There are different ways to earn a second income – and taking on a second job is only one of them. An alternative that involves a lot less work is investing in shares that pay dividends.
Doing so could help me benefit from the business success and hard work of companies such as Unilever and Shell.
Not only that, I would not even need to have any savings to begin with. By putting aside a modest sum on a regular basis, I reckon that, over the long term, I could hope to build a sizeable second income stream.
As an example, with a tenner a day to spare, here is how I might try to build towards a future second income of £10,000 each year.
Getting ready to buy shares
Dividend shares are at the heart of my plan – so I would need some way to buy them!
I would therefore set up a share-dealing account, or Stocks and Shares ISA. That way, I could start putting £10 a day into it and be ready to trade once I found suitable shares to buy.
Learning about how the stock market works
My next move would be to spend some time swatting up on how the stock market actually works. In theory it may seem simple, but things can be rather complicated and so merit study.
Take the question of how to value shares as an example. When looking at a company like Apple or Alphabet it is easy to focus on their business prospects. Both seem to me as if they may continue to make billions of pounds in profits for years to come.
But that is not guaranteed. All companies risk running into choppy waters, after all. Even if it does happen, it does not necessarily follow that buying those shares would be a smart move for me as an investor.
Valuation matters. Even a great company can make for a poor investment, depending on what I pay for its shares.
Buying quality income stocks on sale
When it comes to generating a second income, I would focus on buying shares I thought were likely to reward me with juicy dividends in coming years.
Not all profitable firms pay dividends. Alphabet is a company that prefers to plough profits back into its business.
So I would look for shares with a strong business, healthy balance sheet and low demands on their cash flows that I reckoned might make big shareholder payouts in years to come.
How compounding could help me earn more over time
In today’s market, I think I could do that and earn an average yield of 8% while sticking to blue-chip FTSE 100 companies like Legal & General or M&G.
Remember, I said above that I take a long-term view to investing. So rather than take out my dividends as cash, I would reinvest them. That is known as compounding.
By investing £10 a day and compounding my portfolio value at 8% annually, after 17 years my ISA ought to be generating a second income of £10,000 annually.
By taking a small step today, I could hopefully set myself on a path to a lucrative future!
