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A second income and a second job don't have to go hand in hand.
If I wanted to earn some extra money on a regular basis without working more hours, one approach might be to invest in stocks that I hope will pay me dividends for owning them.
As an example, if you had an extra £20k, you would put it into a stocks and shares ISA and invest it this way to achieve a second annual income of £2k after just two years.
Incidentally, the same approach could work for much less than £20,000 too, although if I invested less money my likely income would fall proportionately.
Aiming at a target
Let's start with the end in mind.
Earning £2,000 a year with a £20,000 ISA could come from a 10% dividend yield.
There are some FTSE 100 stocks that have such a return, including M&G, Phoenix and Vodafone (although it has announced plans to cut its dividend).
But 10% is an unusually high return, as Vodafone's upcoming cut suggests.
An alternative approach would be to earn an average yield of 8.5% and compound the dividends over two years. At that point, my ISA would generate a second annual income of £2,000.
Focus on quality and value
Still, an average yield of 8.5% would not be my criteria when choosing stocks to buy. After all, no dividend is ever guaranteed.
Instead, I would look to buy large companies with attractive cash generation potential (as cash can fund dividends) and attractive share prices. Only if I found those actions could I so Consider your performance.
A stock I would consider buying
As an example, consider Legal and general (LSE: LGEN). If I had extra money to invest, I would happily buy it as a way to increase my passive income.
The company operates in a market (financial services) that I expect will benefit from high and resilient demand in the long term. Its iconic brand, large customer base and distinctive investment ethos help differentiate it from its rivals. That can be good for earnings and dividends.
In fact, Legal & General has paid solid dividends. It last cut its payments during the 2008 financial crisis. Within a few years it had surpassed its pre-cut level and has grown almost every year since.
The business faces challenges. Asset price movements can hurt earnings. Poorly performing stock markets could lead clients to withdraw funds, affecting profits.
Still, I see Legal & General as a promising second income option for my portfolio. The FTSE 100 share returns 8.4%.
Building income streams
I don't find this approach complicated or hard work.
Basically, I'm identifying proven businesses that I believe have strong long-term income generating potential, then considering whether I should buy them and hopefully earn dividends from my purchase.
By doing that I think £20k could net me a second income of £2k annually after just a couple of years.
If I choose well, I can also benefit from growing dividends, meaning my second income could grow over time without having to put more money into my ISA.
