Have you ever thought how helpful it could be to earn money without having to work for it? I know I have, but a lot of schemes promising that just seem like pie in the sky to me. That is why my approach to generating a second income is based on buying dividend shares.
That does not require me to invest lots of money – I can put in whatever I want even if it’s just loose change at the end of the day. Here is how I would do it.
Putting aside a few pounds each day
Three pounds will not go very far these days – it is the price of a sandwich or coffee in some places.
But all those pound coins could soon add up. Putting aside three pounds a day comes to more than a thousand pounds in a year.
If I start using that to buy dividend shares, I could hopefully generate a second income. The amount depends on the dividend yield of the shares I buy. For example, if the yield is 5%, one year of saving could buy me shares that would hopefully earn me nearly £55 in annual dividends. If I held onto those shares and the dividend was maintained, I would hopefully keep earning dividends years into the future.
In this way, although the amount I save each day remains the same at £3, hopefully the second income it generated for me would grow.
Choosing dividend shares to buy
However, not all shares pay dividends and even those that do can stop them at any time. So, how would I decide what ones might suit my purposes best?
I would stick to industries and businesses I felt I understood, as that could help me assess their attractiveness to me as an investor. Then I would hunt for companies I felt had some competitive advantage that might help them maintain a decent profit margin even under pressure from rivals. For example, there is only one McDonald’s. Similarly, Jersey Electricity has a network it would be costly and perhaps impossible for a competitor to copy, while AstraZeneca has exclusive rights to profits from several drugs through its patents.
But share prices also matter. If I pay too much even for a good company, my investment return may be poor. That is why I want to find great businesses selling at attractive prices – and with a juicy dividend to boot that can help me build my second income.
Putting the second income plan into action
Even the best laid plans can go wrong, though, for companies as well as investors. So to reduce the risk to my income streams if a business comes a cropper, I would spread my investments across a diversified range of shares.
To get going, I would start by putting £3 a day into a share-dealing account or Stocks and Shares ISA. Then I would begin my hunt for the sort of promising income shares I want to own — today!
