Taking on a part-time job is one way to earn a second income. But it’s far from the only one. Like millions of other people, I receive regular passive income simply by investing in dividend stocks.
This allows me to benefit from the cash flow generated and distributed by large, successful companies with proven business models.
Not only does it not take up as much time as a part-time job, I also don’t have to invest a lot. If I wanted to build a second income with no money right now by just putting £5 a day aside, I could. That’s how I would go about it.
Regular savings
Everyone’s financial situation is different, but I could easily save £5 a day. That’s £35 a week, leaving me with over £1,800 each year that I could use to buy shares that I hope will pay me dividends.
I would set up a share dealing account or shares ISA and pay the money straight into it so I can start buying shares.
Building the income machine
A central part of my plan to build a second income is to create a stock portfolio that I hope will earn me dividends – my income machine. Although I think of it as a machine, it is not automatic. Dividends are never guaranteed.
Therefore, I would carefully select stocks of strong companies that I understand and that I believe offer excellent business prospects and attractive share prices.
Putting theory into practice
As an example, let’s take the financial services company Legal and general (LSE: LGEN). I added it to my portfolio this year because I believe it has strong passive income potential that I hope will continue long into the future.
With a large customer base and a strong brand, the company can generate significant revenue without spending huge amounts on marketing. In my view, its market for pension-linked financial products has excellent long-term potential.
Legal & General has a proven business model and has shown it can generate strong profits, although there has been quite a bit of movement in recent years. One concern I have in owning this stock (up less than 2% in five years) is whether a stock market crash could prompt policyholders to cash in their policies.
This creates the risk of falling profits and possibly a dividend cut, as we saw at the company during the last financial crisis.
However, I believe that this risk is reflected in the share price, which I believe appears to be cheap.
Revenue ahoy!
This price means that Legal & General’s dividend yield is currently 9.2%, well above the FTSE100 Average.
However, if I could achieve a more modest average return – say 5% – my £1,825 a year would need to generate around £91 in dividends per year. So after 10 years I should have a second income of over £900 a year.
Or if I were to reinvest the dividends, my long-term outcome could be even more rewarding. Ten years later, I would hopefully be earning over £1,170 a year from my stock market investments.
The post My £5-a-day plan to build a second income appeared first on The Motley Fool UK.
Further reading
C Ruane owns shares in Legal & General Group Plc. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article on the companies mentioned in this article are those of the author and as such 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 broad range of insights makes us better investors.
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