Earning a second income could make life easier and more rewarding for a lot of people. But there are only so many hours in the day. Starting a second job may be either unpractical or unappealing.
Thankfully, there is more than one way to make a second income – and not all involve additional working hours.
The appeal of stock market investing
For example, like millions of other people, I own shares in large, proven blue-chip companies that give me money simply for owning those shares. Such payments are called dividends. That lets me benefit from the hard work achieved by their business-savvy leaders in their respective fields.
Doing that, I think I could build a sizeable second income, over time. I would not even need any money to start with.
Saving modestly and regularly to invest
Imagine if, from a standing start, I put aside £5 each day. That would give me over £1,800 a year to invest. If I decided to use the dividends I earned to buy more shares instead of creating cash income (a technique known as compounding), I could actually have more to invest.
To get going, I would set up a share-dealing account, or Stocks and Shares ISA then start putting £5 each day into it.
Why the long-term approach works
Rather than focusing on a second income right now, my plan involves taking a long-term approach to investing. That means I would not expect to have cash to spend from my scheme (given that I would be compounding the dividends) for years. So what is the appeal?
The longer I save, the more money I would have saved to invest. On top of that, over time, the impact of my compounding ought to grow bigger.
Imagine I invest £5 a day and compound annually at a dividend yield of 7% (in this example, I exclude the impact of share price moves, which could work in my favour or against me). After 10 years, I ought to have a share portfolio worth over £6,000 and generating a second income of around £420 each year.
Finding income shares to buy
Although 7% is well above the current average FTSE 100 dividend yield, I think it is achievable in today’s market while sticking to a diversified range of quality blue-chip businesses.
For example, I own shares in Legal & General (LSE: LGEN). This share yields well above 7% (in fact, it currently yields over 8%). It has set out plans to raise its dividend per share by 5% this year and 2% annually in the following years.
That said, no dividend is ever guaranteed and a company can cut them without notice.
As Legal & General focuses on retirement-linked financial services, such as pensions, I think the market it addresses will remain very large for the foreseeable future.
Thanks to a strong brand, large customer base, and specialised financial expertise, I expect the FTSE 100 firm can continue to make sizeable profits with its proven business model.
One risk I see is a sudden market downturn leading clients to withdraw funds. For now though, this big dividend payer continues to help me earn a second income without working for it!
This post was originally published on Motley Fool
