Here’s how investors can build a meaty second income starting from scratch

Building a second income may seem difficult but this Fool dispels that myth. Here’s how, with £100 a week, he’d go about it.

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The main reason I invest is to build my second income. Further down the line when I’m thinking about retirement, I want to have a stream of income that I can rely on to help me enjoy life more. That’s the dream, isn’t it?

I’d say so. And it’s more than possible. Even if I were starting from zero today, here’s the steps I’d take to start making some cash on the side.

How to invest

Before I started to think about how much I wanted to invest, the first step I’d take would be to open a Stocks and Shares ISA. That’s because I wouldn’t be taxed on any profit I made. From the dividend shares I’d be buying, I’d also be able to keep all of the passive income I received from dividend payments.

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.

Starting out

So, I’ve decided I’m going to invest with my ISA. That’s the best way for me to set myself up for success. But what’s next? Well, now comes the most important part. It’s about getting started no matter how much money I have to invest.

People are often deterred from investing as they believe that they need thousands of pounds or a cutting-edge investment strategy to see any gains.

But that’s far from the case. How we start doesn’t matter. What’s imperative is that we start as early as possible and over the long run let the stock market work its magic. I think £100 a week is a sensible starting amount.

Phoenix Group Holdings

Let me show an example of just how powerful this can be. The stock I’m going to use is Phoenix Group Holdings (LSE: PHNX). It’s an insurance company and a leader in the sector.

Its share price is down 1.8% so far this year. But a falling share price isn’t always a negative. For savvy investors, it means they can snap up bargains while the rest of the market overlooks it.

At its current share price, it has a dividend yield of 10.1%, way above the FTSE 100 average (3.6%). I like Phoenix Holdings because it has a strong balance sheet with plenty of cash spare as well as a rising dividend payout.

I see some risks. For example, the insurance industry is cyclical. What’s more, high interest rates and the uncertainty they spark can be detrimental to Phoenix Group’s operations. But given its strong position in the insurance industry, I’m bullish on the company.

Money to be made

Taking my £100 a week and applying it to Phoenix Group’s 10.1% yield ought to see me make slightly over £525 a year in passive income. Not bad.

However, the longer I leave my money in the market, the better chance I have of building my wealth. If I adopt a 30-year investment timeframe and reinvest all the dividend payments I receive, at the end of that I’d be making £10,168 a year in second income. I’d have a nest egg worth £106,269.

Investing always comes with risks and the stock market is volatile. There’s no guarantee that Phoenix Group’s yield will stay the same. It could rise or fall. Nevertheless, what this shows is that even investors starting from scratch are able to build a sizeable pot if they give it time.

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.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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