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!
The post I’d build a second income with £5 a day like this! appeared first on The Motley Fool UK.
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More reading
3 reasons why I love Legal & General shares!
£17,365 in savings? Here’s how I’d use it to target a £6,700-a-month passive income
£11,000 of Legal & General shares could make me £14,583 a year in passive income!
How much do I need to put in the stock market to quit work and live off passive income?
£9,000 in savings? Here’s how I’d try to generate over £100 a month of passive income
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.
