There are different ways to build a second income and taking on another job is only one of them. Like a lot of people, I prefer simply to buy blue-chip income shares that pay dividends.
Dividends are never guaranteed to last, which is why savvy investors keep their portfolio diversified. But by carefully choosing a few high-quality shares, it is possible to build a second income from the hard work of proven companies, even on a limited budget.
Here is how I plan to do that this year with £3 a day.
Small steps add up over time
£3 a day might not sound like much. But in one year, saving that much every day would give me over £1,000 to invest. If I keep going year after year, the amount will grow.
After five years of saving, if I invest in a portfolio of shares yielding 7% on average, I ought to be earning a second income of £383 annually.
But my approach is actually to reinvest the dividends, meaning I have more to invest. Doing that, £3 a day compounded at 7% annually ought to have grown to around £6,499 five years from now. Invested at a 7% yield, that should result in around £455 a year in dividends.
It might not seem like a massive second income, but for three quid a day over five years I think it is pretty decent.
Bear in mind that I would own those shares and so would receive any dividends they paid out for as long as I own them, even if at some point I decided to stop putting £3 a day aside.
Some practical steps to get going
On a practical level, how can I put aside this money and then invest it? Simple. I use a Stocks and Shares ISA (though I could also use a share-dealing account).
Although I already have one, costs and fees can change (and eat into my income) so I try to make sure I have chosen one that works well for me – and that it continues to be a good choice.
If not, I would consider transferring my ISA to a different provider.
Finding blue-chip income shares to buy
In my example above I used an example yield of 7%. That is an average, so I could hit it with some shares that earn less and some that earn more.
One share I own in part for its passive income potential is Diageo (LSE: DGE). At the moment it is well below my 7% target, as it yields 3.4%. But it has grown the payout per share annually for decades and I am hopeful that it can keep doing so.
It might not. It has been facing weaker demand than hoped in Latin America, while recent reported supply problems with Guinness in England have made me wonder whether the company’s supply chain is as robust as it should be.
But with Guinness and spirits brands like Johnnie Walker, the company is able to command premium prices for products with a large target market.
As I look for a large market and sustainable competitive advantage when investing, Diageo strikes me as a natural fit for my portfolio.
