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There are different ways to generate a second income. Not all of them involve working longer hours.
For example, by simply spending money now on shares of some well-known companies with proven business models, you could start earning a second income in the form of dividends.
Dividends and how they can generate wealth
When a company generates extra cash, it can choose what to do with it. Many, but not all, companies use it to fund shareholder dividends.
We're not talking about chicken feed here either.
Last year, for example, companies in the flagship sector FTSE 100 The index of leading British shares paid out a whopping £89 billion.
To get some of that money (or at least the dividends I hope will be paid in the future), all I (or other people) have to do is buy shares of the right companies.
Finding Dividend stocks to Buy
But how can we know which are the right companies?
The simple answer is: we can't. We can only make judgments about what may happen in the future. After all, dividends are never guaranteed. Shell It had not cut its payout since World War II, for example, before surprising shareholders by cutting the dividend in 2020.
But if I can find companies with great potential to make money in the future and pay juicy dividends, I should be able to generate a second income from top-line business success.
two I would buy
As an example, let's consider a couple of FTSE 100 shares that I would happily buy now if I had extra money to invest.
One is the financial services provider. Legal and general (LSE: LGEN). It operates in a market that I believe should benefit from high demand in the coming decades. With its well-established brand and large client base, Legal & General is well positioned to benefit from this.
This week's release of last year's results has provided an updated picture of how the FTSE 100 company is performing. Record volumes were recorded across the company's insurance business during the year. Operating profit was similar to last year and the company increased its annual dividend per share by 5%.
However, earnings per share declined sharply. This was driven by the costs of closing one business, financial write-downs in another and the variation in investment valuations (which for now are a paper cost, not a real one). Similar costs could hurt future profitability, but overall I would happily own the shares.
I am now happily the owner British American Tobacco (LSE: BATS). Cigarette sales are declining in most markets and that is a clear risk to revenue and profits.
But for now, cigarette sales remain substantial. British American's premium brands allow you to make a lot of money. They could also help the company as it increases its sales of non-cigarette products.
That business, for products like vaporizers, is growing rapidly. Over time, I think it could help replace the income lost from cigarettes.
British American has increased its dividend annually for decades, making it a Dividend Aristocrat.
Aiming at a target
Its yield is 10.2%, while the Legal and General yield is 8.2%.
So if you invested £52,000 today and split it evenly between the two stocks, you'd be in line for an average second monthly income of £398.
