A second income of £500 per month for £25 a week? Here’s how!

Christopher Ruane sets out a long-term approach to building a second income for himself that he thinks could prove lucrative.

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Setting up additional income streams without having a second job could be a positive thing when it comes to personal finance. If I wanted to build a second income, I would aim to do so through investing in shares.

I think that could be lucrative: indeed, I think I might be able to hit a £500 monthly income target by investing £25 each week. But that is because, as a long-term investor, my timeframe stretches to decades not just years or months.

Even with a shorter timeframe, I think I could still aim to build up a more modest second income through this approach. Here’s how.

The basics

Shares are like a tiny sliver of a company. In this case I am not thinking about small companies like a local chemist or a car hire centre. Instead, my sights are set on the sorts of blue-chip businesses that sit in the benchmark FTSE 100 index of leading shares, or the smaller firms in the FTSE 250 index.

What I hope is that, by owning even a very minor piece of such firms, I can benefit from their business success when they pay out dividends.

I might make some bad choices or have unfortunate luck along the way, so I would invest in a range of companies to help reduce my risk.

As my focus in building a second income is dividends, I would also look not only for great businesses but for great businesses that look likely to share excess cash with shareholders.

Google parent Alphabet, for example, is massively profitable – but does not currently pay a dividend.

By contrast, Vodafone has a dividend yield of 9.6%. That means that, for every £100 I put into its shares today, I would hopefully earn £9.60 annually in dividends. That is, as long as the dividends stay at the current level (which is never guaranteed and one reason I am very careful when choosing the shares to buy).

Working towards a target

I could take any such dividends out as cash to give me a second income.

Imagine I earn an average yield of 8%. Investing £25 a week like that, I would already be earning £10 per week on average in dividends after five years.

But while that would be welcome, it is a long way off my second income target!

The power of compounding

That is why, taking the long-term view, I would compound my dividends. That simply means reinvesting them in buying more shares.

Imagine I put the same amount away each week in identical shares to my above example, but compounded the dividends. After five years, my portfolio would be worth £7,900 and would generate an annual second income of £632.

But what if I could manage a higher average dividend yield, of 10%?

In that case, after 18 years of investing £25 weekly, my Stocks and Shares ISA would be throwing off £500 per month on average in dividends.

Finding high-quality shares that yield 10% is not easy. It takes time, effort, and research. But if I could manage to do it, my second income goal could come closer into view!

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has positions in Vodafone Group Public. The Motley Fool UK has recommended Alphabet and Vodafone Group Public. 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.

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