One old, simple technique that many people use to build a second income does not involve doing any more work each week. Instead, it is putting money into shares they hope will pay them dividends.
With a long-term mindset when it comes to income investing and £5k to spare, here is how someone could get going with that approach today.
Uncomplicated and potentially lucrative
Some shares pay dividends and some do not. It depends on whether the company has spare cash and a willingness to pay. This means that even a past or current payer can stop at any time. It therefore makes sense to spread the money across a few different shares. And £5k is enough for that.
Another important point, as with any investing, is to choose carefully when deciding what to buy. Imagine investing at a 7% dividend yield (meaning for every pound invested today, 7p is earned in dividends each year) for 20 years, and reinvesting those dividends. After 20 years, the portfolio ought to have grown to a size that a 7% yield would mean £1,354 of second income annually.
Choosing the right shares to buy
Another important element of this approach – and any investing – is deciding what to buy.
With second income as the objective, it might be tempting simply to zoom in on shares that offer large dividends. But remember – dividends are never guaranteed. On top of that, even if a share pays large dividends, if the price goes down enough during the period of ownership, it could end up being a bad investment.
So it is doubly important when thinking about overall return to assess the quality of a business and the potential value offered (or not) by its current share price.
Another factor that can eat into total returns is dealing costs such as fees and commissions. So it is worth taking time to choose the right share-dealing account, Stocks and Shares ISA or share-dealing app.
One share to consider
One of the income shares I think it I worth investors considering is FTSE 100 financial services firm Legal & General (LSE: LGEN). The company has a large customer base, partly thanks to its strong, long-established brand. But it also reflects the fact that Legal & General has focused on a market that is both resilient and has high demand, namely retirement-linked products.
Legal & General has raised its dividend per share annually since a cut during the 2008 financial crisis, except for one year during the pandemic when it held it flat. The current yield is 9%, well above the 7% target I mentioned above.
It aims to keep growing the dividend per share annually. The sale of a large US business should boost its spare cash, but at the expense of profits from that unit over the long term. A severe market downturn could also lead to policyholders withdrawing funds, hurting profits.
Over the long run though, I like the second income prospects offered by Legal & General shares.
