Of all the ways to earn a second income, one that lets other people do the hard work sounds pretty appealing to me. That is exactly what happens in building a portfolio of blue-chip shares that pay dividends.
Here is how an investor (even one who is investing for the first time) could put £200 a week into buying shares and aim to build a second income of £9,091 a year only a decade from now.
Dividends can add up, especially over time
How does that work? Putting the money into dividend shares can start making returns. And those dividends can then be reinvested.
So as well as the ongoing £200 a week contribution, there ought to be a growing stream of dividends being reinvested (called compounding).
After a decade at a 7% compound annual growth rate, the portfolio ought to be worth almost £130,000. If it yields 7%, that would equate to an annual second income of, yes, £9,091.
Setting realistic goals and investing smartly
I use 7% as an example because I think it is a realistic goal for an investor in today’s market. That’s the case even when sticking to blue-chip shares.
Some shares yield 7% or even higher. The compound annual growth rate includes any capital growth too. So it could be possible to hit it even with shares yielding below 7%, on average. Then again, share prices can decline – no dividend is ever guaranteed to last.
So the smart investor will spread their risks with a diversified portfolio. And they’ll carefully assess the risks of a share, not just its potential rewards.
One share to consider
As an example of a share investors could consider, I would point to FTSE 100 insurer Aviva (LSE: AV). Its yield is 6.9%. The share price has also moved up handily over the past year, adding 11%.
Insurance is big business and likely to stay that way. But it can also be very competitive and close attention is needed to maintain underwriting standards.
As an example of what can happen when a company lacks the right competitive advantage and business discipline, consider Direct Line. Aviva is taking it over, which could help it add further economies of scale and expand its already huge customer base.
Then again, it could bring new risks. Integrating Direct Line could distract Aviva management from its core business. But with a strong brand, focused business model and deep insurance industry expertise, I continue to see Aviva as a company with the right elements in place for long-term success.
Getting ready to invest
Putting £200 a week into shares is a discipline that can create the capital to buy dividend shares.
But that money needs to sit in the right place if it is to be used to buy shares. So the first step an investor could take on their second income journey is choosing a suitable share-dealing account or Stocks and Shares ISA.
This post was originally published on Motley Fool
