One way to try and set up a second income is investing in shares. If I am willing to take a long-term approach (which as a believer in long-term investing I certainly am!) then I think even just putting a modest sum into blue-chip shares on a regular basis could help me build a meaningful second income.
As an example, here is how I could aim for extra income of £300 each month over the long term by investing £25 a week into my Stocks and Shares ISA.
Letting quality show itself over the long term
My approach would be based on the principle of aiming to find outstanding companies I felt were undervalued. If the business is outstanding, hopefully, over time, it can grow earnings per share.
Being undervalued today could give the share price space to move up, as well as giving me some margin for error as an investor if things do not turn out quite as well as I hoped.
I would also be looking for companies I expect to pay substantial dividends on a regular basis. And those dividends would form the basis of my second income plan.
Saving and compounding
An example of such a company in my portfolio is M&G. I think its strong customer brand recognition, customer base of millions and resilient demand for financial service could all work in its favour. On top of that, after a recent increase, the FTSE 100 share now yields around 10%.
But even the best of companies can run into unexpected difficulties. So I would diversify my ISA across a range of firms operating in a variety of business areas.
I would keep saving my £25 regularly, while also compounding the dividends rather than withdrawing them as a second income.
Hitting my target
If I did that and averaged a 10% dividend yield (like M&G) then after 14 years, my portfolio should be throwing off £300 per month in dividends. I could stop compounding and start using this as a second income, if I wanted. By continuing to invest regularly, hopefully, over time, I could grow even bigger second income streams.
Although some FTSE 100 firms yield 10% (Vodafone is another alongside M&G) it is still an unusually high yield.
If I had a lower average yield, I could still hit my second income target using the same approach. I would just need to be more patient. At an 8% yield, for example, I should hit my goal after 17 years.
Quite a few FTSE 100 firms yield 8%, or more. I would not buy on the basis of yield alone, but if I thought a company was an excellent business selling at an attractive price, I would consider adding it to my portfolio.
