A second income could come in as a handy supplement when it comes to everyday expenses, or special splurges.
One way to earn a second income is to invest in shares that pay dividends.
That approach has some pros and cons. Cons include that it takes money to invest and dividends are never guaranteed. On the plus side, this approach can be very lucrative — and does not involve extra work in the way that taking on a second job would do.
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Although it takes money to invest, I would not need to have much money upfront.
I could start with zero, drip feed money in and invest as I go. Here is an example of how I could do that with £35 a week to try and earn £1,890 in annual passive income over the long term.
Setting up a way to invest
My first move would be to set up an account through which I could buy shares.
For that reason, I would set up a share-dealing account or Stocks and Shares ISA.
Everyone’s financial circumstances are different and there are a lot of choices available, so I would take time to find the one I felt best suited my own needs.
Finding shares to buy
Next would be what many people think of when it comes to investing: looking for shares to buy.
I would look for companies with proven business models built around competitive advantages in an area I expect to experience ongoing high customer demand.
One dividend share I own
As an example, consider one share that helps me earn a second income at the moment: M&G (LSE: MNG).
It may not be as exciting as Amazon or Tesla. But unlike them, it pays dividends. In fact, the dividend yield is 9.6%. The company also aims to maintain or increase its dividend per share each year.
That is an appealing policy. But as dividends are never guaranteed, it is always important to look at the strength of the business and whether it seems likely to support future dividends.
M&G benefits from large demand in its business area of asset management, something I expect to continue over the long term. It can benefit from that thanks to a strong brand and customer base in the millions spread across more than two dozen markets.
Weak economies could lead some customers to withdraw funds, hurting profits. But in the long run, I think M&G has substantial income potential for a private investor like me.
Aiming for a target
M&G’s dividend is higher than many FTSE 100 peers. But I think I could build a diversified portfolio of quality shares in my ISA with an average yield of 7%.
Putting £35 each week into that and initially reinvesting the dividends, then after 11 years I would hopefully have a portfolio earning me a second income of over £1,890 per year.
