Earning a second income does not have to mean finishing the working day at one job and doing it all over again somewhere else.
For example, a lot of people – even on fairly modest salaries – put money into shares they hope can pay them dividends. That is one way to try and start earning a second income.
Here is how someone could set the wheels of such an approach in motion this month, in three steps.
Step 1: putting money to use
First would be to decide a realistic level of regular contribution. That will vary by person as everyone’s financial circumstances and objectives are different.
The money needs to be in the right place to start buying dividend shares when the time comes.
So, an investor could put it into a suitable vehicle for buying shares, like a share-dealing account, Stocks and Shares ISA or trading app.
Step 2: finding shares to buy
Before putting that money to use against the long-term goal of earning a second income, it is important to get to grips with basic but important market concepts like diversification and how to value shares.
From there, someone can start to use their money to build a diversified portfolio of income shares.
One I think investors should consider at the moment is City of London Investment Trust (LSE: CTY).
This pooled investment vehicle recently hit an all-time high share price. While its focus on mainly UK blue-chip shares may sound dull, that has still seen the trust’s share price growing by 54% over the past five years.
That is a bit better than the 51% achieved by the FTSE 100 index of leading British shares over that period.
City of London’s dividend yield of 4.3% is also above the FTSE 100’s current yield of 3.5%. City of London has grown its dividend per share annually for over half a century.
Remember though that past performance is not necessarily a guide to what will happen in future and dividends are never guaranteed.
City of London’s heavy focus on the UK means its fortunes are closely tied to those of the British economy. With economic performance showing multiple signs for concern this year, I see a risk that a weaker economy could hurt blue-chip share prices and, with them, that of City of London.
Still, the trust’s managers have proved they can grow shareholder value and I am optimistic they will be able to keep doing so over the long term.
Step 3: building income streams
The third step of this plan would be generating the second income.
Putting in £1k a month and taking out the dividends as they were paid, a 4.3% yield would mean that after a decade, the annual second income would be £5,160.
An alternative approach would be to compound (reinvest) the dividends for a decade, then start drawing the second income.
Doing that, still using a 4.3% yield and monthly £1k contributions, after 10 years an annual second income of over £6,400 would be possible.
