Earning a second income does not have to mean taking on a second job. Like a lot of people, I try to earn some extra money by investing in shares I hope can pay me dividends.
Doing that does not require taking on an extra job – and it does not even require having a lot of spare money to invest. I can cut my cloth according to my means.
With a spare £80 to invest each week, here is how I would aim to generate £500 a month in dividend income over the long term.
Finding dividend shares to buy
Some shares pay meaty dividends. Those like Diageo and Cranswick have grown them annually for decades.
But shareholder payouts are never guaranteed. A business that has done well in the past can run into difficult times, or it may decide to spend surplus cash on something other than paying dividends.
So when looking for shares to buy, I ask myself what a company’s future source of dividends is likely to be.
Is the market of potential customers for its products or services large? Does it have something that can help set it apart from rivals, such as the unique brands of Unilever or proprietary technology like AstraZeneca?
I also dig into a company’s finances. Looking at the balance sheet can help me understand how much debt it has. That matters because a company might make a profit but need to use it to pay down borrowings rather than giving me a second income!
A dividend share I’d consider buying
Let me illustrate with an example of a share I have owned in the past and would happily buy now for my portfolio if I had spare money to invest: Legal & General (LSE: LGEN).
The firm operates in the financial services sector, an area I expect to benefit from high customer demand in the long term. It has a proven business model that has been consistently profitable in recent years.
Can it keep doing well? I think so. Its large customer base and well-known brand are both competitive advantages, in my view. But like all businesses it faces risks, such as shifting market valuations of assets it owns eating into its profitability.
I remain upbeat about the outlook for the FTSE 100 company although, as always, when investing I spread my portfolio over a number of companies.
Aiming for a target
How big a second income I can make depends on the amount I invest and the average dividend yield I earn.
I could try and speed things up by reinvesting my dividends. Doing that, at an average yield of 7%, investing £80 a week ought to let me hit my second income target after 13 years. As a long-term investor, I see benefits in waiting.
I could also start drawing a second income much sooner by not compounding, but then it would take longer to hit my target (21 years).
A 7% yield is well above the FTSE 100 average, but I think it is achievable in the current market while sticking to blue-chip shares.
My first move today would be to open a Stocks and Shares ISA.
This post was originally published on Motley Fool
