One of my favourite methods to earn a second income is by owning dividend shares. Building my own business that pays income is difficult, time-consuming and prone to significant risks.
Instead, investors can own a part of established and profitable companies. Many of these pay cash to shareholders in the form of dividends.
But there are a few points to consider to target a £16,539 yearly second income, so let’s dive in.
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How long will it take?
First, I have to note that this goal is likely to take time, especially if I’m starting from zero. Given it’s possible to build a dividend portfolio that yields around 8% a year, I calculate that I’d need a pot worth over £206,000.
If I already have this sum to invest, I could buy a selection of dividend shares and start earning income within months.
But if I don’t have this size of investment, I’d need to save up for it. I could start this plan with as little as £5 a day. But of course, the more I could invest, the quicker I’d be able to start earning passive income.
| Invest per day (£) | £ per year | Years to reach goal |
|---|---|---|
| 5 | £1,825 | 30 |
| 20 | £7,300 | 15 |
| 50 | £18,250 | 8 |
For instance, by investing £5 a day, I calculate I’d reach my target in 30 years. Admittedly, this is a long time, but it’s a relatively small investment to make.
Investing should be considered a long-term activity, but by adding more to my pot every year, I’d be able to speed up the process considerably.
As the table above shows, by investing £7,300 a year instead, I calculate that I’d reach my goal in half the time.
The portfolio
The next part of the plan is to consider which dividend shares to invest in. For this I’d build a portfolio of 10-20 carefully selected top picks.
By doing so, I’d spread my risk and avoid putting all my eggs in one basket.
As this is a long-term plan, I only want to own high-quality businesses. By this I mean they should be profitable, have stable earnings and offer positive prospects.
At the same time, I’m looking for reliable dividend income. This doesn’t necessarily mean a high dividend yield. In fact, I’d be cautious of a yield greater than 10% as it might not be sustainable.
In addition, some of the best dividend shares offer modest yields today but tend to grow dividend payments over time. Often overlooked, many of these shares can result in a larger passive income in the future compared with high-yield stocks.
Building a reliable income stream
For instance, if I had spare cash to devote to this strategy, I’d buy BAE Systems, Diageo and Cranswick. All three offer a dividend yield between 2% and 3%. But more importantly, they have consistently grown their payout for the best part of two decades.
All offer strong and profitable business models. They also have double-digit returns on capital employed, which is a sign of business quality.
Bear in mind all additions in the portfolio would need monitoring to ensure they continue to meet my criteria. And for the rest of my purchases, I’ll need to do some more homework.
