Less than £10,000 of savings? Here’s how I’d aim for a £2,437 second income

Working more hours each week is one way to try and eke out a second income.

But an approach I prefer is simply to invest in shares that one hopes will pay out dividends to shareholders in future.

If I had under £10,000 in savings, I may well still have enough to get going on that approach. Here is an example based on investing £9,000.

Using cash to generate dividends

First let me explain in more detail how this approach might help me build a second income.

When companies generate surplus cash they have a number of choices as to what to do with it. They might build new factories, for example, or fund the takeover of a rival.

One use is paying dividends to shareholders. Companies listed on the London stock market spent well over £1bn per week on average last year paying such dividends.

Simply through buying a share in a company that pays dividends, I am entitled to any ordinary dividends it declares while I hold them. Still, dividends are never guaranteed no matter what has happened in the past, so I would diversify my shareholdings across a number of companies. My £9,000 would be ample to do that.

Building bigger passive income streams

Already I like this plan. If I could achieve a 7% average annual dividend yield, for example, I would hopefully earn 7% of my £9,000 each year: £630.

But I could try and earn even more, while buying the same shares and still using my original £9,000 investment. To do that, I would reinvest the dividends – a straightforward but potentially lucrative investing move known as compounding.

If I compounded £9,000 at 7% annually, for example, after 20 years I ought to have a share portfolio worth almost £35,000. At a 7% yield, that size of portfolio would be big enough to earn me around £2,437 as an annual second income.

Starting today

Time can be the friend of the investor, so I would start investing sooner rather than later as long as I could find quality income shares to buy at the right price.

One share I own that I think fits that mould from my perspective is Legal & General (LSE: LGEN).

The financial services market is large and I expect it to remain that way. Thanks to a focus on the retirement end of the market, Legal & General benefits from long-term growth prospects, substantial cash flows and demand that I expect to be resilient.

It can use its strong brand and large customer base to try and make the most of its position. So far that has worked well – not only is the firm consistently profitable, it also offers a dividend yield of 9.2%.

I do see a risk that turbulence in the financial markets could lead some clients to end their policies, hurting profits.

But I plan to hold my Legal & General shares in my Stocks and Shares ISA for the foreseeable future – and hopefully build my second income.

The post Less than £10,000 of savings? Here’s how I’d aim for a £2,437 second income appeared first on The Motley Fool UK.

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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.