People try different things to earn a second income – including taking on a second job. Could there be easier ways to try and earn some extra money?
A much less time-intensive but potentially lucrative approach involves buying a diversified portfolio of shares in blue-chip companies that pay dividends to their shareholders.
That can be done even on a fairly modest budget. So here is how someone investing less than £100 per week could aim to grow a second income this way.
A slow and steady approach to building income
Let’s say someone invests £90 a week. Over the course of a year, that would add up to £4,680. If that was invested at a 6% yield, it should earn around £280 a year in dividends.
A yield is simply the amount earned annually expressed as a percentage of what is paid in. So 6% of £4,680 is just over £280.
This could be a good start. Six percent is above the average FTSE 100 yield but I see it as achievable in today’s market.
However, by taking a long-term approach, this could become even more lucrative.
Looking to the long term
For example, say an investor keeps putting in £90 a week and compounds the portfolio at 6% annually. Compounding basically means reinvesting income so that dividends in turn can earn dividends.
After 20 years, the portfolio ought to be worth around £177k. At a 6% dividend yield, that should earn a bit over £10k a year in dividends.
So in two decades, putting £90 each week into shares would have built to generate a five-figure second income each year.
Making some smart moves
Getting this right would require making the right choices.
One important choice is how to invest. For example, this could be through a share dealing account, dealing app or Stocks and Shares ISA. Another important choice, of course, is deciding which shares to buy.
I use the plural here because even the best business can run into difficulties, so the savvy investor always diversifies across different shares.
Finding shares to buy
One share I think income investors ought to consider is Legal & General (LSE: LGEN). The FTSE 100 financial services company currently offers a dividend yield of 9%. It also aims to grow its dividend per share by 2% annually.
No dividend is ever guaranteed and so whether the firm maintains its payout, let alone raises it, will ultimately depend on its financial performance.
I think it has a lot to like as a business, including a proven business model. It already has a large customer base and thanks to its strong brand and well-known name, it could hopefully grow that over time.
I also like the company’s focus on retirement-linked products as this is a large market that is likely to endure over the long term.
Still, the sale of a large US business may hurt Legal & General’s future revenues and earnings. Another risk is that volatile stock markets may lead some policyholders to pull out funds, hurting profits.
From a long-term perspective though, I think it is a share worth considering for investors seeking income.
