Having some extra money in the bank each month could certainly come in handy. Rather than taking on an additional job, one way to try and build a second income stream is to invest in dividend shares.
Doing so means I can benefit from the success of large enterprises such as Tesco and Shell. I could start with nothing and put aside a small amount each day. Here is how I would aim to go about that, using just £3 a day.
Setting up an account to invest
My first move would be a practical one – making sure I had a way to buy shares. So I would set up a share-dealing account, or Stocks and Shares ISA, and start putting my £3 a day into it.
How dividend shares can create income
Now £3 might not sound like a lot of money to start building a second income. But, over time, regular saving can really begin to add up. Putting aside that daily amount would give me £1,095 a year to invest.
Not all shares pay dividends and even those that do today could stop tomorrow. But imagine that I put that £1,095 into shares with an average annual dividend yield of 7%. That would, hopefully, earn me almost £77 in income each year.
Yield is simply a term for the dividends I could earn from a share annually, expressed as a percentage of what I pay for it. At the moment, a number of well-known shares from Vodafone to M&G have yields markedly higher than 7%, so I think that is a realistic level of expectation for me.
Growing dividends over time
Dividends can go up or down. I would aim to invest in companies I hoped could grow their shareholder payout over time. So for example, I would consider issues like how attractive a firm’s business model is, as well as its debt position.
But to grow my second income, I would also compound the dividends. Compounding simply means reinvesting the dividends. By doing that, I could buy more shares than I could afford if I simply put aside £3 a day but did not compound. At any point in the future, I could start to take the dividends as cash instead of compounding. That would form my second income.
Earning without working
If I did that for a decade, assuming a 7% average dividend yield, I would hopefully be earning a second income of over £1,000 each year.
For £3 a day, I would be more than happy with that. If I bought great shares at attractive prices, I may also have seen the value of my portfolio increase too, although that is not guaranteed.
But by building a portfolio of blue-chip shares that I think offer appealing income prospects, hopefully I could be earning dividends for years, or even decades, to come.
