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Work more hours to earn more money? That is one way to do it. However, personally, I would prefer to generate a second income without spending more time, if I could.
My own focus is on buying shares in large, successful companies that I hope will pay me dividends in the future. Doing that doesn’t require you to have a large lump sum to begin with. I can tailor the approach to my own financial circumstances.
This is how you would do it with a spare £10 a day.
Acquire the habit of saving
Setting that amount aside would give me over £3,600 a year to invest.
That could form a solid foundation for my second income plan. Not only that, I believe that developing a regular habit of consistently saving through thick and thin should help me develop good financial habits.
Instead of leaving this money under the bed, I would put it in a stock trading account, or Stocks and Shares ISA. That way, you’d be ready to invest it as soon as you had enough saved up and found some dividend stocks you wanted to buy.
Find future dividend champions
How could I find such shares?
Many people think that the stock market is very complicated. But I think it can be useful to think from first principles. Dividends are basically extra money that a company distributes to its shareholders. Therefore, I would look for companies that I thought had strong earnings potential in the future.
As part of that search, I consider future customer demand in a given area. Does a company have any competitive advantages that could help it capitalize on that demand?
For example, I hope people want to sanitize their hands and there is only one Dettol brand. Is property of reckitt. Similarly, GSK It holds patents for some drugs, which means it is in a unique position to benefit from certain health care needs.
I also look at the balance sheet of a company. If you have a large amount of debt, the service could absorb earnings that might otherwise be paid out as dividends.
Great company, decent price.
However, finding a brilliant business is not enough to invest. I also want to buy when the shares sell at an attractive price. Since many investors are also looking to buy shares in quality companies, it can be rare to find them selling cheaply.
But price matters because overpaying can mean a good deal is a bad investment. The price I pay also helps determine my expected dividend yield. Yield is the annual dividends I expect to receive, expressed as a percentage of what I pay.
Second growing income
Let’s say I invest in stocks with an average dividend yield of 5% (I think this is perfectly doable at the moment, as long as I stick to blue chip UK stocks). My first year of saving should generate over £180 in annual dividends.
That would be welcome, but it might sound more like vacation money than a second income.
However, over time, as I continue to contribute my £10 a day, I expect my dividend income to increase. Dividends are never guaranteed, but if I invest in strong companies and their profits increase, the payouts to shareholders could also increase over the years.
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