Earning a second income could help pay some of life’s bills, or put more cash away for a rainy day. Doing that does not have to involve working more hours each week.
My own approach is to invest in blue-chip shares I hope can generate sizeable income for me in the form of dividends. If I wanted to do that here are the three steps I would take.
Step 1: investing the right amount
My first step would be to set up a share-dealing account or Stocks and Shares ISA. I would put money in that to buy dividend shares.
How much? That is a slightly complicated question — so I will come back to it below.
Step 2: finding shares to buy
My next step would be to find dividend shares to buy that I hoped would help me earn a sizeable second income.
Dividends are never guaranteed. Last year, for example, Direct Line suddenly axed its shareholder payout altogether. So what sorts of shares would I look for?
I will illustrate by discussing some pros and cons of a well-known FTSE 100 dividend share: Lloyds (LSE: LLOY).
I like a company that has a large potential market for its products or services. That is true for banks, including Lloyds.
I also look at whether a company has some competitive advantage in its industry. Lloyds has several, including its well-known brands and enormous customer base as the country’s leading mortgage provider.
That has helped the company make large profits, amounting to over £5.5bn after tax last year.
Lloyds uses that to fund its dividend. The dividend yield is 5.6%, meaning that for every £100 I invest I would hopefully earn £5.60 each year in dividends.
But I do not own the shares. Dividends are never guaranteed. Lloyds cut its during the pandemic and I see a risk it could do so again if mortgage defaults increase and eat into its profits.
Using those criteria though, there are other UK shares I would happily buy today to try and build a second income. As the unexpected can always happen, I would spread my portfolio across a number of different companies.
Step 3: let the income flow!
Having built my portfolio, I would not keep changing it. Instead, I would sit back and let the dividends roll in (hopefully!)
I aim to buy into brilliant companies trading for attractive prices with an eye to holding the shares for the long term. I would stay up to date with important developments at the firms though, in case I felt they changed the investment case.
How much to invest?
The amount I need to invest for this second income plan depends on the average dividend yield of the shares I buy.
Some blue-chip dividend shares have higher yields than Lloyds. But using its 5.6% yield as an example, a £10,000 annual second income would require me to invest around £178,600.
I could do that as a lump sum if I had spare cash. Alternatively, I could build up to it over time, from zero. Investing £530 each month, for example, and compounding the dividends, a 5.6%-yielding portfolio would let me hit my second income target in 18 years.
