Have you ever wondered whether the dividends from shares could be a realistic way to build a second income?
That is exactly how some people supplement their earnings. By investing in blue-chip dividend shares, they aim to earn some extra money without having to work for it.
Dividends can add up
Such an approach can be lucrative.
Currently the flagship FTSE 100 index of leading British shares has a yield of 3.2%. That means that, for every £100 invested, an investor would hopefully earn £3.20 per year in dividends.
That might not sound like a lot.
But it depends on how much is invested and at what yield. Although the FTSE 100 average is 3.2%, I think 6% is a realistic target in today’s market even while sticking to a carefully chosen basket of proven blue-chip businesses.
Imagine that somebody invests £1,000 each month and compounds it at 6%. That compound growth can come from dividends or share price growth, though share price declines could eat into the rate achieved.
Compounding at 6%, after 20 years the portfolio ought to be worth a bit over £453k.
At a 6% yield, that is big enough to generate a second income of £523 per week on average.
Getting the right approach
Can it actually be as simple as that makes it sound?
I do think this approach can be fairly straightforward. But it requires discipline and the investor also needs to take care when choosing shares to buy.
After all, dividends are never guaranteed. Even the best company can run into unforeseen difficulties.
It is also necessary to have a practical way to buy shares and hold them, such as a share-dealing account, Stocks and Shares ISA, or trading app.
On the hunt for dividend shares
I said above I think a 6% yield is realistic as an average of the different share yields within a portfolio. Not all of them would necessarily need to yield 6%.
One share I think investors should consider is high-yield FTSE 100 financial services firm Phoenix Group (LSE: PHNX).
Phoenix itself may not be widely known outside financial circles, but some of its operating businesses such as Standard Life certainly are.
In fact, Phoenix has millions of customers. The long-term savings and retirement business is a big player in a section of the market that experiences high, resilient demand.
I expect that to remain the case in years and even decades to come.
With its large client base, deep operational expertise, and powerful brands, I think the company could continue to be highly cash generative.
It already yields 7.9%. It also aims to grow its dividend per share each year, though, as at any company, the dividend is never guaranteed to last.
What sorts of things could potentially get in the way of ongoing dividend growth (or even maintenance)?
One risk I see is any significant market downturn hurting the value of some of Phoenix’s assets. That could force it to write down the value of its mortgage book, eating into earnings.
As a long-term investor, though, I continue to like the prospects for the company and see it as a share for investors to consider.
