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Building a second income can involve doing a lot more work yourself – or passively benefitting from other people’s work.
In practice, that can mean earning money thanks to owning dividend shares in proven blue-chip companies like Tesco, Apple, or Coca-Cola.
Here is how such an approach could be used to target an annual second income of £8,794 per year on average.
Dividend shares can be lucrative income sources
When a company generates more cash than it needs, it can do different things with it. Some companies save it for a rainy day, while others invest it for business growth. Some pay dividends.
Dividends are never guaranteed to last. Indeed, that is one reason the savvy investor diversifies their portfolio across a number of different shares.
But dividends can be lucrative. Take a share with a 5% dividend yield, for example. Someone who buys it will hopefully earn 5% of their initial investment each year in dividends. They will also still own the shares, which could rise or fall in value during their period of ownership.
Using dividends to build income streams
Owning a diversified portfolio of dividend shares could therefore be one way for someone to try and build up a second income.
Starting with a lump sum to invest, the income could potentially start flowing in a matter of months or even weeks. But even without a lump sum, such a plan can still work if someone drip feeds money into it on a regular basis.
For example, putting aside £100 a week would give someone an investment pot of over £5,000 per year to put to work. A 5% yield on that would already amount to £260 per year.
But there is much greater potential than that.
Compounding £5,200 annually at 5% for 20 years would give an investor a portfolio worth almost £176,000. At a 5% dividend yield, that would generate an annual second income of just under £8,800.
Getting started
To do that, an investor needs a way to save up those regular contributions then use them to buy shares. That could be a share-dealing account, Stocks and Shares ISA, or share-dealing app, for example.
One share I think investors should consider for its second income potential is insurer Phoenix Group (LSE: PHNX).
Unlike some fellow FTSE 100 insurers, Phoenix is not a household name. However, it operates under well-known brand names such as Standard Life.
It has a progressive dividend policy, meaning it aims to grow its dividend per share annually. Not only that, but its current dividend yield north of 7% is already more than double the FTSE 100 average.
Phoenix’s business has multiple strengths, ranging from millions of customers to a proven model that has significant ongoing cash generation potential.
But, like any business, Phoenix also faces risks. For example, it has a large mortgage book – if a weakening economy led to property prices falling steeply, that could mean the valuation assumptions in the mortgage book no longer hold, hurting profits.
Over the long run, though, I reckon Phoenix has the potential to continue being a significant dividend payer.
