Working takes time and effort but sometimes it still does not produce one’s ideal income. A second income can help – but may require working many more hours in the week. That is one reason I like the idea of investing in dividend shares. Hopefully they could help me build a second income over time, without me needing to add more hours to my working schedule.
Here is how I would go about doing that if I had a spare £100 a week to invest.
Setting the goal
How much I could earn from owning dividend shares depends on a couple of key factors. Those are, first, how much I invest and, secondly, the average dividend yield of the shares I buy.
£100 a week adds up to £5,200 per year. Imagine I invested that in shares with an average yield of 5%. That should generate £260 of dividend income per year. That sounds appealing, but it is pretty modest if I am seeking a second income. The following year, though, investing another £5,200 should generate the same amount – while I should still get dividends from the shares I had bought in the first year. In this way, over the years, I would hope to see the dividends I received annually grow from hundreds to thousands of pounds.
The role of dividend yield
But while the amount I save is within my control, the dividend yield I receive is not. That is because companies can change dividends at any point. So while I may buy shares that currently yield 5%, such as DS Smith and Land Securities, those firms could reduce or even cancel their dividend in future. Then again, they might raise them.
That is one reason I diversify my portfolio across a number of shares and business sectors. That helps to reduce the impact on my second income if a share I own cuts its dividend.
But it also helps explain why I focus on buying what I see as quality businesses first and focus on their dividend only after that. Buying a share in a business I do not rate highly or even understand simply because it currently offers a juicy dividend yield makes no sense to me. Instead, I would prefer to own shares in companies I believe can increase their profits in future. That could help them grow their dividend – and with it, my second income.
Finding shares to start building a second income
How would I try to find such shares?
I would stick to what I know and understand, then look for businesses in those areas. Not only would I look at how profitable I expected them to be in future, I would also consider whether the current share price offered me good value. Paying too much for a share can mean even a successful business provides a disappointing investment.
Although I would not start with the dividend yield, I would still pay attention to it given that my objective is second income. Some great companies pay out little or none of their earnings as dividends, because they prefer to reinvest them in the business. I would look instead for shares I expected to pay substantial dividends, that could help me patiently build a growing second income stream.