In today’s tumultuous economic environment, building a second income is more important than ever. Markets are in turmoil, politics are getting heated and the future is uncertain at best.
When looking at some of the political developments unfolding this week, it’s hard to be positive about the future. Having a financial safety net may soon become a necessity — not just a luxury.
But passively sitting back and waiting for it to happen won’t help. What I really need is my money passively sitting in an investment account and paying me dividends.
So how can that happen?
For many, the idea of extra earnings conjures thoughts of side hustles, freelancing, or part-time work. But I think one of the easiest ways to grow a second income is through investing in quality stocks.
And the good news? Getting started doesn’t require a small fortune.
The power of compounding dividends
Investors looking to build passive income often turn to dividend shares as the first port of call. These are companies that pay out a portion of their profits to shareholders on a regular basis — often quarterly or annually.
Let’s say an investor puts just £200 a month into a portfolio of dividend-paying shares. That might not sound like much, but thanks to compounding — reinvesting dividends to buy more shares — it can snowball over time. Assuming a realistic 7% annual return from high-yielding stocks, that regular investment could grow to over £34,000 in 10 years. Stretch that out to 25 years and it could balloon to over £160,000.
At that point, withdrawing the dividends would give the investor almost £1,000 a month of passive income. Sure, today’s economic issues may be long gone in 25 years. But some of the wealthiest income investors of today probably started their journey after the dot-com bubble burst in 2000.
History has a tendency to repeat itself so no matter how long it takes, it’s never a bad time to start.
Shares to consider
Well-established FTSE 100 companies like Legal & General (LSE: LGEN), Unilever, and Phoenix Group have a strong track record of paying reliable dividends. By building a diversified portfolio of such companies, it’s possible to earn regular payouts that can either be reinvested or taken as income.
Take Legal & General, for example. It’s one of the UK’s largest financial services firms, providing pensions, insurance, and investment management. Crucially, for income investors, it offers an attractive dividend yield — currently hovering around 9% — and has a strong track record of returning cash to shareholders.
One big advantage is the company’s stable, cash-generative business model. It benefits from long-term trends like ageing populations, which drive demand for retirement products and life insurance. It also has a sizeable investment management arm, which adds an element of diversification.
However, there are some drawbacks. It operates in a highly regulated industry, which can limit flexibility and lead to higher expenses for compliance. It’s also sensitive to interest rates and market volatility, both of which can impact asset values and customer behaviour.
When it comes to building a second income through dividends, investors must weigh up the risks and benefits. Compared to other options, I find this simple approach attractive — but only for those with patience and a long-term outlook.
This post was originally published on Motley Fool
