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Earning a second income could make life easier and more rewarding for many people, but there are only so many hours in a day, so starting a second job may be impractical or unattractive.
Fortunately, there is more than one way to generate a second income, and not all of them involve additional work hours.
The appeal of investing in the stock market
For example, like millions of other people, I own stock in large, blue-chip companies that pay me money simply for owning those shares. Those payments are called dividends, and they allow me to benefit from the hard work of their business leaders who are experts in their respective fields.
If I did, I think I could generate a sizable second income over time. I wouldn't even need money to get started.
Save modestly and regularly to invest
Imagine if, starting from scratch, I set aside £5 each day. That would give me over £1,800 a year to invest. If I decided to use the dividends I earned to buy more shares rather than create cash income (a technique known as compounding), I could have more to invest.
To start, you would open a stocks and shares ISA, and then start depositing £5 each day into it.
Why the long-term approach works
Rather than focusing on a second income for now, my plan involves taking a long-term investment approach. That means I wouldn’t expect to have cash to spend from my plan (since I’d be compounding dividends) for years. So what’s the appeal?
The longer I save, the more money I have saved to invest. Plus, over time, the impact of my compound interest should increase.
Let's say I invest £5 a day and get a compounded annual dividend of 7% (in this example, I'm excluding the impact of share price movements, which could work for me or against me). After 10 years, I should have a share portfolio worth over £6,000 and generate a second income of around £420 a year.
Finding Income stocks to Buy
Although 7% is well above the current average FTSE 100 Index Dividend yield: I believe this is achievable in today's market as long as you maintain a diversified range of quality blue-chip companies.
For example, I have shares in Legal and general (LSE:LGEN). This stock offers a yield well above 7% (in fact, it currently offers a yield above 8%). The company plans to increase its dividend per share by 5% this year and by 2% annually in the coming years.
That said, no dividend is ever guaranteed and a company can cut it without warning.
As Legal & General focuses on retirement-related financial services such as pensions, I believe the addressable market will remain very large for the foreseeable future.
With a strong brand, large customer base and specialist financial expertise, I expect the FTSE 100 company to continue to make considerable profits from its proven business model.
One risk I see is a sudden market crash that leads clients to withdraw funds. However, for now, this great dividend payer continues to help me earn a second income without having to work for it.
