Earning a second income without working for it may sound too good to be true. But in fact that is what millions of people already do simply by investing in shares that pay them dividends.
Buying dividend shares and building a passive income stream does not even require large sums of money.
If I had a spare £3 per day and wanted to use it that way in 2024, here is how I would go about it.
Dividend shares and passive income
Not all shares pay dividends. But some do. Basically if a business makes money and has some left over it might choose to divvy it out among shareholders.
That means that a firm may not pay dividends because it is unprofitable or simply because it has other uses for any spare cash it generates.
Having said that, a host of big British businesses like Diageo and British American Tobacco have been paying dividends and indeed increasing them annually for decades. Many others have been regular payers, though the amount each year has sometimes moved down as well as up.
Simply by buying shares in such companies, I can get any dividends they pay.
Indeed, if I buy now and hold the shares for years, I could earn dividends year after year. They will form my second income.
Starting on a small scale
How much might I realistically earn doing this ?
That depends on a couple of things. First is how much I invest. A daily £3 adds up to over £1,000 a year, so saving that could ultimately gives me sizeable funds to invest.
But it also depends on the size of my average dividend yield. That is the dividends I earn from a share in one year expressed as a percentage of its share price when I buy.
Right now, for example, Lloyds has a yield of 5.4%. So for every £100, I invested I ought to earn around £5.40 each year in dividends – if the bank maintains its payout at the current level.
Some FTSE 100 shares yield more: 6%, 7%, 8%, 9%, or even 10%. Vodafone is close to 12% at the moment.
If I managed to earn an average yield of, say, 7% while buying only high-quality businesses I felt were likely to maintain their dividend, after one year my £3 a day should be earning me almost £77 each year.
Long-term perspective
The bigger second income opportunity, though, lies in the long term as I keep on investing £3 each day. That is even more true if I reinvest the dividends I earn rather than taking them as cash.
That is known as compounding.
Investing just £3 a day at an average yield of 7% and compounding the dividends, after five years I would already have a share portfolio earning me a second income of over £450 annually if I chose to take the dividends out as cash.
Meanwhile, I could keep investing my £3 a day and growing my portfolio. Hopefully that would also see my dividend income increase over time.
