With the first month of the year almost over, New Year’s resolutions can already seem like a distant memory! But improving one’s financial wellbeing is not just a pipe dream project for the early days of January. It is a practical endeavour upon which one can embark at any time. A proven way to get more financially healthy is to generate a second income.
Second incomes do not have to involve getting another job. Like millions of people, I generate one by investing in shares that pay out cash dividends.
If I wanted to build an extra income stream from scratch, I could aim to do so by beginning to put aside less than £5 a day and investing it in blue-chip shares. February would be as good a time to start as any!
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Using shares to build a second income
The theory behind the practice is not complicated.
When successful companies make profits, they have a choice of what to do with the cash. They can reinvest it in the business, use it to pay down debt, or share it among shareholders in the form of dividends.
Each company can make its own choice. Some highly successful companies like Alphabet pay no dividends, while others such as British American Tobacco pay a portion of their earnings out to shareholders.
If I own shares in a company that declares a dividend — as I do with British American Tobacco — I will receive any cash it pays for as long as I hold them. As dividends are never guaranteed, I would aim to build a diversified portfolio of high-quality shares I thought could help me build a second income in the form of dividends.
Saving cash to invest
Buying the shares costs money, though.
The good news is that I could set up my plan using as little or as much money as made sense to me, based on my personal financial circumstances.
Putting aside £30 a week in a share-dealing account or Stocks and Shares ISA would give me over £1,500 per year to invest. If I can achieve an average dividend yield of 5%, my first year’s savings alone should earn me around £77 per year in dividends. If I kept saving regularly and investing, hopefully my second income would grow over time.
Making smart investment choices
Could I realistically achieve the 5% average dividend yield I use in my example above?
Actually, I could earn more. Or less. What I end up earning depends on how well I invest the £30 I save each week. Rather than let greed get the better of me, I would aim to invest in high-quality companies with proven business models with shares selling at an attractive price.
With my aim of income, I would focus on shares I thought could pay out dividends from their profits.
I’d start now not later
This plan could work at any time. If I saved money regularly and invested it, I ought to be able to build up a second income.
So why wait?
