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More money but no extra work? That may sound too good to be true. But there is more than one way to earn a second income. For example, one method I use is to create a portfolio of stocks that I hope will earn me dividends in the future.
Here’s how you could do it, using an ISA with £20,000 (although the same approach might work with less money, you’d just make less).
preparing to invest
To get started, I would set up my Stocks and Stocks ISA and deposit cash into it before the annual contribution deadline early next month. That way, I would have it ready to invest when I decided which stocks to buy while trying to generate a second income.
But just because I put the money in my ISA doesn’t mean I’m rushing to invest it. If you had already decided which stocks to buy, you could start buying them right away. But if I was still choosing, or if the price of the stocks I liked still didn’t appeal to me, I would wait patiently before putting the money to work.
Dividend Stock Purchase
What kind of stocks would you be looking for?
My second income would be made up of dividends. So I’d like to invest in companies that I think could generate profits for years or decades to come, which could pay out like dividends.
You would first look for areas where you expected to experience high customer demand in the long term. I would then look to identify firms that were operating in those areas that I felt had some competitive advantage.
For example, father of Google Alphabet it has what I see as a strong competitive advantage in an area where I expect to see strong demand for a long time to come. Its shares are also trading at what I consider an attractive valuation.
But there’s one final yardstick I’d use: Is the company likely to pay out earnings as dividends?
Alphabet doesn’t, for example, as it keeps profits within the business to finance growth. Instead, I earn handsome dividends from the stocks I own in mature industries. british american tobacco it’s an example
Building a second income
How much I can earn with this approach depends on several factors.
One is the average return on the stocks I buy. If I invest £20,000 in stocks with an average return of 10%, my second annual income should be £2,000. If the yield were 5%, you should be earning £1,000 each year in dividend income.
A company could stop paying dividends (or worse, file for bankruptcy), so I would spread my ISA investment across a diversified range of stocks. Hopefully that could mean that investing £20,000 today would earn me a second income for decades to come.
If I choose the right companies with great businesses, they may increase their profits and dividends over time. That way, I may see my annual dividend income increase.
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