One common way to earn a second income does not involve taking on a second job. Simply by buying and owning shares that pay dividends, someone could hopefully earn a stream of cash.
How much depends on what they invest and in which shares. Not all shares pay dividends and some suddenly stop doing so. So diversification is important – and so is knowing about the shares one is buying.
From a standing start and putting aside £80 per week to invest, here is how an investor could target a second income of over £1,000 each month on average.
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Planting the seeds for future returns
I use £80 as an example here although an investor could tailor the amount to their own situation. Everyone is different.
The principle, though, is the same: getting into a regular saving habit can help build a base of capital that can be used to purchase dividend shares. They will hopefully lay the foundation for future passive income streams.
A good place to start could be looking at the different share-dealing accounts and Stocks and Shares ISAs on the market to see which one seems most suitable.
Over £1,000 each month without working for it
How much income the approach generates depends on the size of the investment and the average dividend yield.
Yield is the amount earned in dividends annually, expressed as a percentage of the cost of the shares. So a 5% yield, for example, means that for each £100 invested, the investor would hopefully earn £5 in dividends annually.
Putting in £80 a week at 5% and reinvesting the dividends, after 20 years the portfolio would be generating a second income of around £586 per month.
If an investor could achieve a higher yield – say 7% — then that monthly second income would be approximately £1,027.
Finding dividend shares to buy
So, even a small-seeming difference in yield can make a big difference to the size of the second income.
However, higher yields can sometimes indicate higher perceived risks. You see, 5% is already well above the average FTSE 100 dividend yield, while 7% is around double it.
In the current market, though, I think it is possible for an investor to target a 7% yield while sticking to quality blue-chip shares.
FTSE 100 member Legal & General (LSE: LGEN), for example, has a storied brand that stretches back centuries – but continues as a financial powerhouse today.
Its market, of retirement-linked financial services, is huge and I expect it to remain that way. Legal & General has a large customer base and proven business model.
It has raised its dividend annually in recent years and plans to keep doing so, albeit at a lower rate than before.
But past performance is no guarantee of what may happen in future: dividends are never assured. A planned US business sale will reduce the size of Legal & General’s business, potentially hurting profit levels.
However, I see it as a share an investor should consider when aiming to build a second income.
