Image source: Britvic (copyright Evan Doherty)
There is more than one way to earn a second income, and not all of them involve working longer hours!
For example, by owning shares of blue-chip companies with proven business models, you could hopefully generate passive income streams from dividends. Dividends are money that a company pays to shareholders just for owning its shares.
Sometimes it may seem like investing in the stock market is for those who have a lot of money to spare. In fact, one of the things I like about investing in stocks is that you can do it on a scale that fits your budget. With an extra £80 a week and wanting to make a second income by buying dividend stocks, this is how I plan to do it.
Looking for the right things to buy
It's easy to know how much a stock has paid in dividends over the past year. Using that as a percentage of the price paid for the stock gives what is known as the dividend yield.
So, for example, a 5% return means that if I invested £100 in a share a year ago, I should have received £5 in dividends over the last 12 months.
That's not the same as saying that if you invest £100 now, I'll get £5 next year. Dividends can increase, but they can also be reduced or canceled entirely.
Therefore, when it comes to generating a second income, I wouldn't start by focusing on performance. Instead, I would look for stocks of great companies that I expect to generate a lot of extra cash in the coming years. I would not only consider the quality of the company, but I would also focus on buying companies whose shares were attractively priced.
a celebration that I like
As an example, let's consider a stock in my portfolio that I still like for its income prospects: asset manager M&G (LSE: MNG).
Asset management is a sector that I expect to benefit from sustained long-term demand. M&G has millions of customers, not only in the UK but also in several overseas markets. It benefits from a strong brand and also from its long experience in the asset management business.
Taken together, I think those things add up to a recipe for success and, hopefully, maintaining your dividends. He FTSE 100 The company has a policy of attempting to maintain or increase its dividend per share annually.
Take steps to balance risks and rewards
In practice, it remains to be seen whether that actually happens. One risk I see is that a market correction could lead to customers withdrawing funds from M&G products, damaging profitability.
Those types of risks explain why I diversify my stocks and shares ISA across a number of different stocks.
Currently, M&G has a profitability of 10%. Even if I achieved a lower average yield of 6% (still well above the FTSE 100 average) and reinvested the dividends along the way, after a decade I would expect to earn a second income of £3,380 a year.
