If you have been thinking about ways to earn a second income you are probably at least vaguely familiar with the idea of buying shares that pay dividends.
But what does that look like in practice?
One easy way to imagine it is to work through an example – here, I will use an approach based on someone contributing £300 per week.
Why a long-term approach can build serious income streams
In isolation, £300 might not sound like the basis for a strong income flow.
But remember, that is per week. So, week after week, month after month, and year after year, the amount invested can add up.
Meanwhile, what is already invested can help generate dividends. Those can be reinvested (compounded) in the beginning if desired, to increase the potential size of a second income down the line.
So, say someone puts aside £300 per week and compounds it at 6% annually. After a decade, the portfolio ought to be worth over £211,000.
At a 6% yield, that should generate around £12,676 of dividends per year. That would mean a four-figure monthly second income on average.
From idea to action
While that may sound good in theory, it will not happen by itself!
A useful first step is choosing a share-dealing account, Stocks and Shares ISA, or trading app to put the £300 into each week.
Setting up a regular contribution, such as a standing order or direct debit, could also help solidify this idea into action.
On the hunt for quality dividend shares
Another step is finding dividend shares that look set to maintain or even grow their dividends in future – something that is never guaranteed.
One share I think investors should consider at the moment is FTSE 250 firm Pets at Home (LSE: PETS).
For many of us, the first thing that name brings to mind may be the extensive network of retail shops selling everything from accessories to food for moggies, mutts, macaws, and more.
But the company also operates a large network of vet practices. The brand familiarity from one side of the business – boosted by an extensive loyalty scheme – can help drive custom for the other.
That two-pronged approach has been showing its usefulness lately. The retail operation has struggled to maintain sales, but good performance on the vet side of the business has helped counteract that.
Still, there is an ongoing risk that the wrong product assortment or pricing could make the firm’s shoppers look elsewhere. That helps explain why the share is 47% cheaper than five years ago.
That price fall also reflects a somewhat reduced interest in pets post-pandemic.
But this market is still massive and a falling share price has helped push the dividend yield upwards. It now stands at 6.2%.
I find that attractive from an income perspective. Indeed, Pets at Home is currently in my portfolio so I am hoping it will earn me welcome dividends in years to come!
