Taking on more work is one way to earn a second income. Another is simply putting some spare money into dividend shares.
If an investor puts just £800 into a portfolio of dividend shares today, I think they could realistically expect to be earning a small second income as soon as this summer.
Some pros and cons of investing in dividend shares
Dividends can be great. Someone can spend money buying shares in a company that has already proven itself and is consistently profitable, then just sit back and watch a growing stream of dividends arrive for years, or even decades.
While that does happen, it is not always the case. Dividends are never guaranteed and even a previously excellent payer can cut its dividend, or cancel it completely.
So careful selection is required and it is important to weigh risks as well as the second income potential of any given share.
What could £800 really earn?
Different companies take a variety of approaches to paying dividends. Some, like Unilever, pay quarterly. So I do think it is realistic to foresee an investment this month already generating income by the summer (or potentially even sooner).
The average dividend yield for FTSE 100 shares right now is around 3.6%. But given the price of some blue-chip shares in today’s market, I think it is realistic to target an average 7% yield while sticking to FTSE 100 shares.
On an £800 investment today, that could mean £56 of second income a year. There is also the potential for capital gains, if the price of shares purchased moves up, although the reverse can also happen.
Finding shares to buy
As an example of the sort of share I think an investor could consider to start building a second income, FTSE 100 insurer Aviva (LSE: AV) fits the bill.
Its yield right now is a little below the target I mentioned above, at 6.7%. It does have a recent history of growing the payout per share annually. But it also cut it sharply in 2020. I think that helped put the dividend on a more sustainable footing, but it underlines the point I made above that even a proven blue-chip firm can reduce its dividend.
Insurance is a big market. I expect it to stay that way for decades to come (and frankly I would not be surprised to see it endure long beyond that). Aviva has already been operating (under a variety of names, such as Norwich Union) for a long time. So it has deep industry experience and knowledge. It owns strong brands and has a large customer base.
Those strengths help it make money and I think that could be boosted by cost efficiencies from a pending merger with Direct Line. Then again, mergers can be a tricky business and there is a risk that disruption integrating the two different businesses could hurt profits and distract management attention.
Getting on the passive income train
The idea of building a second income through buying dividends is not a complicated one. But how to start the ball rolling, this month (or this weekend)? One first move could be for a new investor to look at the different share-dealing accounts and Stocks and Shares ISAs available and choose a suitable one to start.
This post was originally published on Motley Fool
