There are different ways to generate a second income. Not all of them involve working more hours.
For example, simply by spending money now on shares in some well-known companies with proven business models, I could start earning a second income in the form of dividends.
Dividends and how they can build wealth
When a company generates spare cash, it has a choice of what to do with it. Many companies, though not all, use it to fund shareholder dividends.
Should you invest £1,000 in British American Tobacco right now?
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We are not talking chicken feed here, either.
Last year, for example, companies in the flagship FTSE 100 index of leading British shares paid out a whopping £89bn.
To get some of that money (or at least the dividends I hope will be paid in future), all I (or other people) need to do is buy shares in the right companies.
Finding dividend shares to buy
But how can we know what the right companies are?
The simple answer is: we cannot. We can only make judgments about what may happen in future. After all, dividends are never guaranteed. Shell had not cut its payout since the Second World War, for example, before shocking shareholders by slashing the dividend in 2020.
But if I can find businesses with strong potential to make money in future and pay juicy dividends, I ought to be able to build a second income on the back of blue-chip commercial success.
Two I’d buy
To illustrate, consider a couple of FTSE 100 shares I would happily buy now if I had spare cash to invest.
One is the financial services provider Legal & General (LSE: LGEN). It operates in a market I think ought to benefit from high demand for decades to come. With its well-established brand and large customer base, Legal & General is in a good position to benefit from that.
This week’s release of last year’s results has given an up-to-date picture of how the FTSE 100 firm is performing. The year saw record volumes in the company’s insurance businesses. Operating profit was similar to last year and the company raised its annual dividend per share by 5%.
Earnings per share declined sharply, though. That was driven by the costs of closing a business, financial writedowns in another, and variance in investment valuations (which for now are a paper cost, not an actual one). Similar costs could hurt future profitability, but on balance I would happily own the shares.
I already happily own British American Tobacco (LSE: BATS). Cigarette sales are declining in most markets and that is a clear risk to revenue and profit.
But for now, cigarette sales remain substantial. British American’s premium brands let it earn a lot of money. They could also help the company as it grows its non-cigarette sales.
That business, of products like vapes, is growing fast. Over time I think it could potentially help replace the lost cigarette revenues.
British American has raised its dividend annually for decades, making it a Dividend Aristocrat.
Aiming for a target
It yields 10.2%, while the Legal & General yield is 8.2%.
So if I invested £52,000 today and split it evenly across the two shares, I would be in line for a monthly average second income of £398.
