Having a side hustle can be a lucrative way to earn a second income. But speaking from personal experience, these projects tend to be quite time-consuming and often fail to generate the same level of potential returns as income investments in the stock market.
And since the latter doesn’t require anywhere near as much hands-on attention, it’s a far more passive strategy for earning some extra income.
With that in mind, here’s how I’m building a second passive salary.
Focus on the long run
With lots of high-yielding opportunities in the London Stock Exchange to pick from, it can be tempting to snap up shares with the highest dividends. However, historically, this strategy seldom works well in the long run. That’s because high yields are often unsustainable or are paired with weak share price performance that offset any gains.
That’s why with my secondary income portfolio, I’ve been largely ignoring high-yield shares. Instead, my focus is on finding income-generating businesses with the potential to hike shareholder payouts continuously.
Taking this approach usually means settling for dividend yields sitting between the 2% and 5% range when an investment is first made. But suppose the company can continuously expand payouts supported by consistent free cash flow generation. In that case, those yields can expand drastically long term.
Growing yields over time
Let’s take a look at an example from my income portfolio – Safestore Holdings (LSE:SAFE). The business is pretty simple. The management team invests in commercial warehouses, converts them into self-storage facilities, and then rents them out to individuals or companies.
Beyond the capital required to invest in the properties initially, the actual running of self-storage facilities isn’t capital intensive. So once the rental cash flows pay off debt interest, the rest is available to pay dividends. And with the real estate portfolio growing over the last 15 years, shareholders have enjoyed some fairly stellar gains.
Investors who bought shares in May 2010 locked in an initial dividend yield of just 3.6% – roughly in line with what the FTSE 100 offered at the time. But after 15 years of consecutive and sustainable dividend hikes, the yield today has grown to a jaw-dropping 22.3% on an original cost basis.
Needless to say, earning a 22% return on investment just from dividends is pretty extraordinary.
Every investment carries risk
Safestore continues to be a superb business, in my eyes, even with the recent slowdown in demand due to higher interest rates. However, that doesn’t mean the firm’s guaranteed to repeat its stellar track record moving forward.
The lucrative nature of the self-storage market hasn’t gone unnoticed. And today, there’s considerably more competition in this space than in 2010. What’s more, management’s expansion into the European markets also presents a potential headwind.
The European self-storage industry is still in its infancy compared to the UK. Management’s aiming to replicate its previous success abroad. And to be fair, if this strategy works, some enormous gains could lie just around the corner. However, heavily investing in a young market can be risky, especially if the growth expectations fail to emerge on the expected timeline.
Despite these risks, I still think Safestore has plenty to offer for investors seeking a second income, making it worth considering, in my opinion.
