There is more than one way to earn a second income – and they do not all involve working more hours!
For example, by owning shares in blue-chip companies with proven business models, I could hopefully build passive income streams thanks to dividends. Dividends are money a company pays to shareholders just for owning its shares.
It can sometimes seem that investing in the stock market is for those with bundles of cash to spare. In fact, one of the things I like about share investment is that it can be done on a scale that suits one’s own budget. With a spare £80 per week and wanting to build a second income by buying dividend shares, here is how I plan to go about it.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Searching for the right things to buy
It is easy to know how much a share has paid out in dividends over the past year. Using that as a percentage of the price paid for the share gives what is known as a dividend yield.
So, for example, a 5% yield means that if I invested £100 into a share one year ago, I ought to have received £5 in dividends over the past 12 months.
That is not the same as saying that putting £100 in now will earn me £5 in the coming year. Dividends can go up, but they can also be cut or cancelled altogether.
So, when building a second income, I would not start by focussing on yield. Instead, I would look for shares in great companies I expect to generate lots of spare cash in years to come. Not only would I consider the quality of the company, I would also focus on buying into companies whose shares I felt were attractively priced.
One holding I like
As an example, consider one share in my portfolio that I continue to like for its income prospects: asset manager M&G (LSE: MNG).
Asset management is a sector I expect to benefit from sustained demand over the long term. M&G has millions of clients, not only in the UK but also in a number of overseas markets. It benefits from a strong brand and also its long experience in the asset management business.
Taken together, I think those things add up to a recipe for success – and hopefully maintenance of its dividend. The FTSE 100 firm has a policy of aiming to maintain or grow its dividend per share annually.
Making moves to balance risks and rewards
In practice, whether that actually happens remains to be seen. One risk I see is that a market correction could lead clients to pull funds from M&G’s products, hurting profitability.
Those sorts of risks explain why I diversify my Stocks and Shares ISA over multiple different shares.
At the moment, M&G has a yield of 10%. Even if I managed a lower average yield of 6% (still well above the FTSE 100 average) and reinvested the dividends along the way, after a decade I will hopefully be earning a second income of £3,380 per year.
