Taking on a part-time job is one way to earn a second income. But it is by no means the only one. Like millions of other people, I regularly receive passive income simply thanks to investing in dividend shares.
That lets me benefit from the cash generated and distributed by large, successful companies with proven business models.
Not only does that not take the time a part-time job would involve, I also do not need to invest a lot. In fact, if I wanted to build a second income with no money now and simply by putting aside £5 a day, I could. Here is how I would go about it.
Regular saving
Everyone’s financial circumstances are different. But I could comfortably put aside £5 a day. That is £35 a week, meaning I would have over £1,800 each year I could use to buy shares I hoped would pay me dividends.
I would set up a share-dealing account or Stocks and Shares ISA and put the money straight into it, enabling me to start buying shares.
Building the income machine
Central to my plan to build a second income is creating a portfolio of shares I hope to pay me dividends – my income machine. In fact, although I think of it as a machine, it is not automatic. Dividends are never guaranteed.
So I would carefully choose a range of shares in strong companies I understood and felt had outstanding business prospects, along with attractive share prices.
Putting the theory into practice
As an example, consider the financial services company Legal & General (LSE: LGEN). I added it to my portfolio this year precisely because I think it has strong passive income potential I hope can last far into the future.
With a large customer base and strong brand, the firm can generate sizeable revenues without having to spend vast sums on marketing. Its market of retirement-linked financial products has excellent long-term potential, in my view.
Legal & General has a proven business model and has demonstrated it can generate strong profits, although they have moved about a fair bit over the past several years. One concern I have about owning this share (up less than 2% in five years) is whether a stock market crash could lead policyholders to cash in their policies.
That risks hurting profits and perhaps leading to a dividend cut like we saw from the company in the last financial crisis.
However, I feel that risk is reflected in the share price, which I think looks cheap.
Income ahoy!
That price means the Legal & General dividend yield is currently 9.2%. That is far above the FTSE 100 average.
But if I could earn a more modest average yield — say 5% — my £1,825 a year ought to generate around £91 of dividends a year. So after 10 years, I should be earning a second income of over £900 a year.
Or if I reinvested the dividends along the way, my long-term result could be even more rewarding. Ten years later I would hopefully be earning over £1,170 annually from my stock market investments.
The post My £5-a-day plan to build a second income appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Looking to earn income through passive investing? Here are 3 top dividend stocks to consider
£70-a-week passive income in 7 steps? Here’s how!
When it comes to passive income, beware of lies, damned lies, and statistics!
Turning a £20k ISA into a £16,000 annual second income? It’s possible!
I’ll buy 4,682 Legal & General Group shares for dividend income of £1,000 a year
C Ruane has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.