Building a second income does not necessarily mean taking on an additional job. My own approach is based on buying shares in a range of well-known successful companies I hope can pay me growing dividend streams.
That approach does not require me to work – and it also does not take a lot of money upfront. In fact, I could start with nothing and put aside a few pounds a day to get going. Here is how I would do that.
Small, regular saving
Putting aside £3 a day may not sound like the foundation for beefy financial rewards. But, over time, that money can add up.
If I get into the habit of regular saving, I think I am more likely to stick with it. Saving £3 each day for a year would give me over £1,000 to invest. After a decade, I would have saved almost £11,000 to buy shares.
I would set up a share-dealing account, or Stocks and Shares ISA so that, as the money grew, I could invest it.
How dividends work
Buying shares on its own does not necessarily mean I ought to expect dividends. That depends on which shares specifically I buy.
Some companies, like Google parent Alphabet, reinvest profits in the business rather than divvying them up among shareholders. Others simply do not make enough money to have spare cash to spend on dividends. That does not necessarily mean they are bad shares to buy, but with a second income as my objective they would not be on my shopping list.
Instead, I would hunt for businesses that have a proven business model with strong profit potential and that I expected to pay out dividends in future.
Past performance is not a guarantee of what happens next, so I would not just focus on a company’s dividend history. I would dig into its accounts and look at the free cash flows it is set to generate. They are what enable a business to pay cash to shareholders.
Long-term income
At first, I would err on the side of caution. Over time, as I became a more experienced investor, I might broaden my horizons. But the stock market can be a risky place, so I would focus on putting my £3-a-day to good work without letting greed push me into overly risky investment choices.
Partly that would involve me diversifying across a range of companies. But key to my success (or failure) would be my selection of companies. I would stick to ones I understood and that I felt offered the prospect of decent reward relative to risk.
How much I might earn depends on the amount I invest and the average dividend yield. Investing my first year’s savings at an average yield of 5%, for example, I ought to earn around £55 in annual dividends.
That would be welcome pocket money but not really a second income. As a long-term investor though, if I kept saving regularly and chose shares well, hopefully the dividends would start to pile up.
