A second income does not necessarily need to involve having two jobs. Many people build a second income by setting up additional ways of earning money. For example, owning a portfolio of shares that can pay dividends could throw off spare cash year after year.
Suiting your own circumstances
I like that approach to earning an extra income for a number of reasons. It does not involve the time and commitment of a second job. It lets me benefit from the performance of large companies with proven businesses. I can also tailor it to my own financial circumstances.
As an example, here is how I could aim to build an annual second income of over £1,000 by putting aside just £10 a day.
Slow and steady
On its own, £10 might not sound like the stuff of Rockefeller dreams. However, putting aside £10 a day would give me £3,650 a year to invest.
That is a substantial amount that I could use to buy dividend shares in a number of companies (as smart investors always diversify across a range of investments).
I think saving regularly could not only help me to build funds to invest, but also develop positive personal finance habits. To do that, I would set up a share-dealing account, or Stocks and Shares ISA.
Finding shares to buy
My next move would be to learn more about the stock market so I could find the right sorts of shares to buy.
I would stick to large blue-chip companies with businesses I felt able to understand and assess. For example, one of the shares I own is JD Wethespoon. I can read its accounts online and also draw some conclusions of my own by popping into some of its pubs.
In terms of building a second income though, Wetherspoon would not be one of my choices. Currently, it does not pay a dividend. Instead, I would look for companies I expect to generate sizeable free cash flows and use them to pay dividends.
For example, I own cigarette maker British American Tobacco. It generates large free cash flows (for now at least, although the risk of declining cigarette sales hurting profits is something I considered when buying the shares).
Those cash flows help fund a juicy dividend. Right now, the dividend yield is 9%. That means for every £100 I invest in British American Tobacco shares, I would (hopefully) earn £9 a year in dividends.
Unlocking the income gusher
Of course, 9% is quite high for a FTSE 100 share to yield (although some others like Vodafone are even higher).
But imagine I could achieve an average yield from my diversified portfolio of 8%. At that rate, £3,650 ought to earn me just under £300 a year in dividends.
That would be welcome – but is below my second income target. If I kept investing for four years at that rate though, my total dividend earnings would hopefully grow each year. In under four years, I could have hit my second income target of earning over £1,000 annually.
