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Ever thought about putting money into some shares to try and build a second income through dividends?
After all, Britain’s blue-chip FTSE 100 firms pay out well over £1bn per week on average in dividends.
That goes to shareholders who do not have to do anything to earn it, other than owning those shares.
Dividend shares can be lucrative
Building a second income by setting up a portfolio of dividend shares sounds pretty straightforward. It can also be lucrative.
But there are risks too. Dividends are never guaranteed to last. Share price falls can also eat into capital value, even if dividends keep flowing.
On the other hand, dividends can grow – and so can share prices.
Clearly, it makes sense for an investor to take some time to figure out what shares might best suit them in their hunt to balance potential rewards and risks.
Here’s what it takes to earn £500 per week!
Say someone’s second income target is £26k annually, which works out at £500 per week.
How much they need to invest will depend on the average dividend yield of their portfolio. Yield is basically what dividends one expects to earn in a year, expressed as a percentage of the purchase price.
At the moment, the FTSE 100 index yields 2.9%. Say someone targets double that: a yield of 5.8%. In today’s market I still think that is possible while sticking to high-quality shares.
At a 5.8% yield, a £26k annual second income would require investing around £448k.
Slowly building up an income machine
£448k is a lot of money. But it does not need to be invested all at once.
In fact, someone could start from zero today, then drip feed money in over time, building up to that goal.
Say they did that with £1k a month, compounding it at 5.8% annually. Within 21 years, the portfolio ought to be worth more than the necessary £448k.
At that point, instead of continuing to compound the dividends, they could start taking them out as a second income, without needing to put another penny in.
Choosing the right way to invest
There are different platforms the person could use for that regular saving, compounding, and investment.
So it makes sense for them to contrast and compare share dealing accounts, Stocks and Shares ISAs, and trading apps.
One income share worth considering
At the moment I think an income share investors should consider is Legal & General (LSE: LGEN).
At 8%, the yield is well above the target I mentioned above. The FTSE 100 financial services firm aims to grow its dividend per share annually, though in practice no dividend is ever guaranteed.
The company has a large customer base. Its brand is strong and it has deep experience in its field. A focus on retirement-linked products means it can tap into a large, long-term market.
The planned sale of a large US unit could mean future cash flows are smaller, threatening the dividend.
But on balance I see Legal & General as a well-proven business with long-term cash generation potential.
