Earning a second income could help pay some of life’s bills, or put more cash away for a rainy day. Doing that does not have to involve working more hours each week.
My own approach is to invest in blue-chip shares I hope can generate sizeable income for me in the form of dividends. If I wanted to do that here are the three steps I would take.
Step 1: investing the right amount
My first step would be to set up a share-dealing account or Stocks and Shares ISA. I would put money in that to buy dividend shares.
How much? That is a slightly complicated question — so I will come back to it below.
Step 2: finding shares to buy
My next step would be to find dividend shares to buy that I hoped would help me earn a sizeable second income.
Dividends are never guaranteed. Last year, for example, Direct Line suddenly axed its shareholder payout altogether. So what sorts of shares would I look for?
I will illustrate by discussing some pros and cons of a well-known FTSE 100 dividend share: Lloyds (LSE: LLOY).
I like a company that has a large potential market for its products or services. That is true for banks, including Lloyds.
I also look at whether a company has some competitive advantage in its industry. Lloyds has several, including its well-known brands and enormous customer base as the country’s leading mortgage provider.
That has helped the company make large profits, amounting to over £5.5bn after tax last year.
Lloyds uses that to fund its dividend. The dividend yield is 5.6%, meaning that for every £100 I invest I would hopefully earn £5.60 each year in dividends.
But I do not own the shares. Dividends are never guaranteed. Lloyds cut its during the pandemic and I see a risk it could do so again if mortgage defaults increase and eat into its profits.
Using those criteria though, there are other UK shares I would happily buy today to try and build a second income. As the unexpected can always happen, I would spread my portfolio across a number of different companies.
Step 3: let the income flow!
Having built my portfolio, I would not keep changing it. Instead, I would sit back and let the dividends roll in (hopefully!)
I aim to buy into brilliant companies trading for attractive prices with an eye to holding the shares for the long term. I would stay up to date with important developments at the firms though, in case I felt they changed the investment case.
How much to invest?
The amount I need to invest for this second income plan depends on the average dividend yield of the shares I buy.
Some blue-chip dividend shares have higher yields than Lloyds. But using its 5.6% yield as an example, a £10,000 annual second income would require me to invest around £178,600.
I could do that as a lump sum if I had spare cash. Alternatively, I could build up to it over time, from zero. Investing £530 each month, for example, and compounding the dividends, a 5.6%-yielding portfolio would let me hit my second income target in 18 years.
The post A £10,000 second income in 3 steps? Here’s my plan! appeared first on The Motley Fool UK.
Should you buy Lloyds Banking Group shares today?
Before you decide, please take a moment to review this first.
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Claim your free copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
If I’d invested £5k in Lloyds shares 5 years ago, here’s what I’d have now
Why I think Lloyds shares are one of the best bargains out there
These 3 beaten-down value stocks should soar when interest rates fall
1 dividend giant I’d buy before Lloyds shares for February onwards
At 43p is the Lloyds share price an unmissable bargain or UK’s biggest value trap?
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.
