How I’d build a second income for £8 a day

Our writer thinks putting less than a tenner a day into dividend shares could help him build a growing second income. Here’s how.

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Some extra money coming in each month could be helpful. But earning a second income does not have to mean taking on a second job.

An alternative approach is benefitting from the hard work of millions of other people by purchasing shares in large, successful companies that seem likely to pay out dividends to shareholders.

For under £10 a day, here is how I would use that approach to try and build second income streams.

Getting into a regular investment habit

My first move would be to set up a share-dealing account or Stocks and Shares ISA. I would then get into the habit of regularly drip feeding money into the account that I could then invest in shares.

Putting a relatively modest amount of money aside on a regular basis can soon add up. My £8 a day, for example, would mean I have almost £3,000 a year to invest (£2,920 to be precise).

Earning income from shares

But how would this money help me earn a second income? By investing it in shares I hope to pay me dividends, I could build an income-generating stock portfolio. How much I earn depends on the amount I invest and the average dividend yield I earn.

For example, investing £2,920 at a 10% yield ought to earn me £292 a year in dividends. That though, would be an unusually high yield. The average FTSE 100 yield is currently under 4%.

By investing more each year (thanks to continuing to save £8 a day), my income could grow over time.

If I buy a share now and keep holding it, it might continue to pay me dividends for decades. In fact, some shares have even raised their dividends annually for decades.

Finding shares to buy

An example of just such a share (known as a Dividend Aristocrat) is Diageo (LSE: DGE). The company is the maker of drinks such as Talisker and Guinness. It has a large addressable market of consumers and, thanks to its portfolio of premium brands, it has what is known as pricing power. That helps make it solidly profitable.

Last year for example, sales were £23.5bn and post-tax profits came in at an impressive £3.8bn. Cheers to that!

There are risks. Slowing sales in Latin America have hurt company performance recently and that could be a sign of wider challenges to come in a global economic slowdown. Over the long term though, I remain upbeat about the company’s prospects.

But while I like Diageo shares, if my focus was purely on building a second income, they would not be on my shopping list.

The dividend has grown annually for decades, but the yield of 2.8% is far less than I could earn on some other blue-chip shares I would also happily own.

Avoiding yield traps

Note though, that I did not start my search for shares to buy by focusing on yield. That could lead me into traps… shares with a high dividend when I buy them that later gets cut.

Instead, I would go about building a second income by trying to find great businesses with attractive share prices — and only then consider their dividend potential.

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.

C Ruane 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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