Sometimes when I look at examples of how to build a second income, I need to have £100k+ of initial capital. For example, this relates to buying a property to rent out. Yet via dividend shares, I have the potential to build up cash flow even if I can only afford £250 to begin with. Here’s the strategy I’d use.
Building up a portfolio
I’m going to assume that each month I have spare funds of £250 that I can afford to invest in the market. To avoid paying high transaction costs via my investment provider, I’d look to buy one stock per month.
Even though this might sound like putting all of my eggs in one basket, the following month I’d use the money to buy a different stock. Over the course of a year, I’d have built up a diversified portfolio that should be paying me some form of income each month.
In the second year and beyond, I’ll give myself the option to either top up my holdings in a dividend share I already own, or allocate it to a new one. Regardless of this choice, whenever I receive an income payment, I’ll reinvest it back into my portfolio. This helps to compound my rate of return and will build up my long-term second income potential.
Something to consider
If I was starting this strategy today, I think one of the hottest dividend shares I’d pick right now is TP ICAP (LSE:TCAP). The dividend yield for the FTSE 250 stock is 5.79%. Even though this might not seem exceptionally high, I think this could rise in the future.
The share price has rallied by 45% over the last year, showing that the business is doing really well. The firm specialises in brokering financial deals between institutions, particularly focusing on short-term trading. Volatile markets are a good thing for TP ICAP, so this year has been strong. In fact, it recently posted record Q3 revenues.
The dividend per share has been increasing year after year. With the full-year results (due out next year) likely to see another dividend hike, I think the outlook is rosy. Of course, I do need to be aware that this is a niche area of financial services to operate in. Therefore, there’s a cap on how big the business can become. Yet I feel there’s still plenty of growth potential right now.
How it could add up
I’m thinking about buying TP ICAP shares. If I assumed that I could invest £250 each month with an average yield of 6%, my pot can grow quickly over time. After 15 years, I could stop investing new cash and enjoy £3,969 of second income in the following year. This equates to an average monthly figure of £330. This isn’t guaranteed, the actual amount could be higher or lower depending on market performance.
This post was originally published on Motley Fool
