A second income can be a useful supplement to an investor’s earnings. As the weeks before Christmas often remind us, life can be an expensive affair.
But taking on a part-time job is only one way to earn a second income. Another one, that involves less work (in fact, basically none), is buying shares that can hopefully pay a stream of dividends in the future.
That approach has several appealing factors, in my view. One is that it allows me to benefit from the success of proven, profitable businesses like Legal & General and JD Sports. Another is that I can do it in a way that matches my own financial circumstances.
In fact, even if I had just a few pounds a day to spare, I could put such a second income plan into operation in 2024. As an example, here is what I would do with £3.80 a day (the cost of a sandwich).
Saving to invest
I would start by setting up a share-dealing account or Stocks and Shares ISA. There are lots of different options available, so I would consider the choices carefully and choose whatever seemed to meet my own needs and circumstances best.
Next, I would get into the habit of putting my £3.80 a day aside. That could be physically piling up some loose coins each day, or setting up a direct debit, for example.
It may not sound like a lot, but over a year, saving that amount each day would give me £1,387 to invest.
Building passive income streams
How much that could earn me depends on the average dividend yield of the shares I buy. Yield is basically the annual dividend per share expressed as a percentage of the price I pay for it.
Say I managed an 8% yield, for example. Investing £1,387 at that yield should earn me an annual second income of £110.
But remember, that is using only one year’s worth of daily savings. In the second year, I would keep saving but hopefully would still be earning dividends from my prior year’s investment. So on and on, with the second income hopefully growing .
I could accelerate that process by reinvesting the dividends rather than taking them out as cash at first. That is known as compounding.
Finding shares to buy
I think an average 8% yield is realistic. Legal & General yields 7.9%, for example, quite a few FTSE 100 shares are higher. I say average as I would diversify my portfolio across multiple shares.
Still, 8% is around twice the FTSE 100 average. JD Sports yields less than 1%, for example.
Buying shares simply because they have a high yield could be something I later regret. Dividends are never guaranteed. Direct Line started 2023 with a double digit yield, for example, and now it is down to zero.
So I would focus on finding brilliant companies with shares prices I find attractive. Once I find them, I could decide whether they might offer a good fit for my second income objectives.
