Setting up a second income not just for next year, or even the next decade, but the rest of my life appeals to me.
One way to do that – in fact a way that millions of people including me already use – is to drip feed money into building a portfolio of blue-chip shares that will hopefully pay dividends long into the future.
Such dividends are never guaranteed, but by diversifying a portfolio across a number of different shares, hopefully there will always be some income even if individual shares reduce or cancel their payouts along the way.
To put that into perspective by the way, FTSE 100 investment trust Scottish Mortgage last cut its dividend per share almost a century ago, after the famous 1929 Wall Street crash!
With a spare £10 a week, here is the approach I take to building such passive income streams.
What to look for when buying dividend shares
I think it is too easy – and potentially unhelpful – to complicate things when it comes to the stock market. So like billionaire investor Warren Buffett, I tend to think of a share as a small stake in a company.
I would not invest in a company I do not understand. Nor would I buy into one unless I felt upbeat about its long-term prospects – and felt the price I was paying represented good value for what I was getting.
One blue-chip income share I own
Putting that into practice when it comes to shares that help me earn a second income, consider Diageo (LSE: DGE).
The company behind drinks such as Guinness and Talisker may not have as long a dividend track record as Scottish Mortgage. Still, it has raised its dividend per share annually for over three decades, making it what is known as a Dividend Aristocrat.
Key to that has been the firm’s ability to generate large free cash flows. Demand for alcoholic drinks is high and Diageo owns a premium brand portfolio that helps set it apart from rivals. There may be other stouts and porters, but there is only one Guinness. That means Diageo has pricing power.
Still, there are clouds on the horizon. In the short term, weak sales in Latin America could hurt profits. Longer term, declining rates of alcohol consumption could reduce demand globally, though Diageo is expanding its non-alcoholic offer to counter this risk.
After falling 24% in five years, the Diageo share price now looks reasonable to me. That is why I bought the share this year.
Income forever
Diageo’s dividend yield is 3.4%. Even at that level, if I invested £10 a day and reinvested the dividends for a decade, by then I would earn an annual second income of around £1,400 a year. Or I could choose not to compound my dividends and start drawing an income immediately.
I could (and do) earn a higher yield by investing in other blue-chip FTSE 100 shares. Crucially though, I always focus on business quality and a good share price, not just chasing yield.
Putting aside money on a regular basis to invest, for example into a Stocks and Shares ISA, can be a rewarding habit!
