Is it possible to earn a second income through investing in the stock market?

Is turning stock market investing into a second income just a pipe dream or is it actually achievable for regular investors?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In today’s uncertain economy and high inflation, investors may seek the security of a second income stream. But whether this can be achieved through investing in the stock market remains the big question. The good news is that there’s plenty of evidence to show that it can be.

Slow but steady growth

Generating a second income is incredibly valuable as it provides financial security. And one way to generate passive income is through investing in the stock market.

While investing requires starting capital, starting with small sums and building a portfolio over time can lead to outstanding gains. The key is consistency. In order to find success this way, investors will have to regularly set aside funds to purchase dividend stocks that spin off cash.

And just like a fruit tree, invested capital can produce its own income harvest year after year. Tiny seeds planted today could blossom into a money tree that provides stability during turbulent times.

The power of compounding

Certain investments tend to produce abundant income streams. Most prominently, dividend stocks with higher yields tend to pay a larger percentage of profits or assets to shareholders. These tend to include giants like British American Tobacco or Lloyds in recent times.

The key here is to focus first on quality when selecting income investments. Investors should research the financial health and future prospects of a company before buying into its stock. But more importantly, investors should diversify their investments across industries to minimise risk.

From there, investors can reinvest a portion of the dividends they receive and compound that growth. Over time, this could lead to a tremendous amount of wealth.

For instance, investing $10,000 at a 4% dividend yield generates $400 annually at first. But reinvesting those dividends can grow portfolios over time, resulting in ever-higher yields and payouts.

The biggest challenge

Having said that, investors should take note that building a second income through investing in stocks requires consistency, patience, and research. But nearly anyone can get started regardless of experience or savings.

Starting small with £25 or £50 per week and sticking to a programme through up and down markets is paramount for success. And given time, even modest investments can snowball into five-figure annual passive income.

Supplemental income from investing in the stock is by no means guaranteed as markets fluctuate. But over long periods, compounding returns have powered growth. Plus, dividends provide a ballast when share prices drop.

As such, now could present an opportune time to put savings to work, as many UK stocks are discounted relative to their historical averages and fair value amid uncertainty in the UK economy and globally.

With patience and discipline, investors can see their capital bear fruit. The short term may see continued volatility, especially in the current macroeconomic climate. But this shouldn’t stop investors from seizing the opportunity to start today and generate a meaningful second income over the years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Choong has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Dividend Shares

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’d turn £1,000 into a lifetime of passive income

Creating streams of passive income now will help this Fool further down the line. With £1,000, here's how he'd start…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Don’t worry about a stock market crash, I’d buy cheap dividend shares now

It's easier to identify good dividend shares than predict how the stock market will perform. So why waste time worrying…

Read more »

Senior couple crossing the road on a city street. They are walking with shopping bags while Christmas shopping.
Investing Articles

How I’d target a yearly £11,737 second income from UK dividend shares in 2024

UK shares offer ample opportunities for a chunky second income. Our writer explores how he’d aim to earn a five-figure…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

7.1%+ yields! 3 high-dividend FTSE 250 stock ideas for passive income in 2024

The yields on these FTSE 250 income heroes rise close to 9% for next year. I think they could be…

Read more »