How I’d invest just £10 a day in stocks to build a second income of £400 a month!

A second income isn’t always an additional job. This Fool explains how dividend shares could help build an additional income stream.

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At one stage in life I could easily spend at least £10 a day on take away coffees. Now, I can use that same amount to help build a second income stream by investing in quality FTSE shares that pay dividends.

Let me be very clear, I will not stop drinking coffee. Investing in a decent coffee machine, and working from home a lot more, has changed my caffeine habits.

I’ll illustrate how I could put a spare £10 to work to boost my wealth.

Crunching the numbers

The very first thing I’d do is open a Stocks and Shares ISA. My thinking behind this is the tax man doesn’t get a penny of any capital gains or dividends using this method.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Next, I’d need to start buying top stocks that pay a consistent and safe yield. This is crucial, as dividends are never guaranteed. So ideally I’m looking for blue-chip stocks with good fundamentals as well as future-proof dividends.

Dissecting the numbers, £10 a day equates to £70 in a week. Over 52 weeks, that’s £3,640. Now if I aim for the FTSE 100 average rate of return in recent years of 7%, over 15 years, I would have amassed £96,172.66.

I’m now going to draw down 5%, and then split that into monthly income. That would leave me with £400 a month.

This is a long-term plan and illustration, and involves reinvesting the dividends received. Plus, I’m conscious the rate of return received may not reach 7%. Conversely, the level could rise too.

One stock I’d buy to help

Let’s say I was able to execute the above plan today. I would love to buy a stock like Diageo (LSE: DGE) as part of a diverse portfolio of holdings, if I could.

Personally, a nice coffee is my vice. However, many others prefer the warmth and enjoyment of an alcoholic drink. Diageo is the owner of multiple popular brands and comes with an impressive track record, as well as a great profile and reach.

The business is what’s known as a Dividend Aristocrat. In simple terms, it’s got an enviable reputation for rewarding investors and hiking payouts regularly. At present, the shares offer a dividend yield of close to 3%.

Recent times haven’t been the best for Diageo, or its shares. This is due to a tougher economic picture. As the world battles with tighter wallets and rising costs, leisure activities and branded drinks aren’t high on everyone’s priority list. This has hurt the firm’s sales and performance, and these underpin returns, so I’ll be watching with interest moving forward.

On a newsworthy note, I can see that Diageo today appointed Sir John Manzoni as its new chairman. The well-respected businessman’s fresh impetus could be just the thing the business needs to overcome its recent mini-blip.

As a long-term investor, with a long-term vision, once volatility subsidies, Diageo is the exact type of stock I reckon that could help me boost my wealth and flourish once more.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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