Earning some extra money could always help, whether it is with paying bills or just having a bit extra to spend at the end of the month. My own preferred approach to earning a second income is to buy dividend shares. In fact, I like that approach so much that even if I already had a second job, I would use it to generate a third income!
One of the things I like about building a portfolio of dividend shares as a passive income idea is the fact that it does not require me to find more hours in the week for work.
On top of that, I could use the approach even with limited funds. For example, if I had a spare £890 now (or could pull it together in coming months), here is the second income plan I would put into action.
Earning money without working for it
I would start by setting up a share-dealing account or Stocks and Shares ISA.
Then I would deposit my £890 into it so that I would be ready to start buying dividend shares when I found some I liked.
I am using the plural there, because even what seems to be the best share can turn out to be disappointing sometimes. By spreading my money across a few choices, I would have some diversification. £890 would comfortably be enough for me to invest in three or four different blue-chip companies I felt offered strong income potential.
Finding shares to buy
But how could I find some I liked?
Basically, I would focus on well-established businesses with proven commercial models. I would be hunting for companies I felt looked set to benefit from ongoing strong customer demand and some competitive advantage that helped set them apart in their market.
As my focus would be on building a second income through dividends, I would also consider whether the company’s business model, balance sheet and likely cash flows could help fund future dividends.
Love it, or love the income!
Let me illustrate with an example.
Unllever (LSE: ULVR) is a large company that produces consumer goods used several billion times a day. It focuses on areas in which I expect to see resilient demand, like detergents and food.
The business owns iconic brands like Marmite. The spread is famous for dividing consumer opinion. But I do not need to be one of the fans who love Marmite to see the undivided financial appeal of a product that has no direct competitor. That, along with proprietary premium branding for dozens of products, gives Unilever pricing power.
Of course, all businesses face risks. Higher ingredient costs might hurt profits at Unilever, while shifting consumer tastes could dent sales. But if I had spare cash, I would happily add the shares to my second income portfolio.
Earning without working
Unilever currently offers a dividend yield of 4.1%.
If I invested my £890 in a diversified portfolio with an average yield of 4.1%, that ought to earn me around £36 per year. That is a second income, but it is a small one.
However, I could boost my income by investing more, earning a higher yield (though I would not compromise on the quality of shares I bought when trying to do that), or reinvesting my dividends to enable a larger second income down the line.
