Given the rise in inflation over the past year, the value of having a second income is rising fast. I’m a huge fan of generating cash from as many different avenues as possible. Only one of these is from buying dividend stocks. But if I had a normal day job and had the choice of just one passive income source, I’d choose to make use of dividend shares. Here’s the lowdown.
Making money from existing money
My second income stream starts from funnelling some of the cash from my primary income. I like to think that my primary cash generator is pretty stable, so can bank on this going forward. What this allows me to do is to set aside money each month to put into dividend shares.
Ideally, I’ll put in a set amount each month. In reality, this doesn’t always work, so my figures vary depending on what expenses I have to deal with. But the bottom line is putting at least something away regularly.
At this stage, there’s no money coming back to me in the form of passive income. I’m only taking money away from myself.
The long-term view
The reason I’m not claiming back any of my second income at the moment is because I’m letting it grow. When I buy different dividend stocks each month, I have to wait for dividends until the next payment date is due. Sometimes this can take several months. At that point, I’ll get paid a set dividend per share figure, based on how many shares I own.
In theory, this is my income. I could sit back and enjoy it now. Yet I’m focused on enjoying a much larger amount further down the line. The phrase “less jam today means more jam tomorrow” comes to mind.
Reinvesting the dividend back into the company grows my exposure and allows me to receive a larger dividend next year. When I do this across multiple stocks and multiple years, the compounding impact is substantial.
Second income potential
Further down the line, my ultimate goal is for my second income stream to allow me to retire early. For example, let’s say I manage to invest £350 a month for the next 15 years. I’ll assume an average dividend yield of 5% over this period. I might be able to push this up with high-dividend stocks, but I’m being conservative.
At the end of this period, I’ll be making just under £400 a month in passive income, even without investing a penny more. Granted, this isn’t enough for me to live off, but when I combine it with my pension and other investments, it should allow me to consider retiring early.
Of course, there are risks when planning for the unknown future. I might not be able to afford to put away £350 a month. Or the dividend yield in reality might be much lower. These are forecasting problems, but I have to make reasonable assumptions in order to see what my potential earnings could be.
