Here’s how to build a £10k+ second income from just 5 shares

One common, simple way people earn a second income without working for it is buying shares in companies that pay dividends.

That does not necessarily need to involve buying into large numbers of different companies. Some diversification is important as a risk management strategy, but I reckon an investor could earn a significant second income from shares in just a handful of carefully selected blue-chip companies.

Earning now, or compounding for future

The FTSE 100 index of leading businesses has an average dividend yield of 3.4% right now.

That is only an average, so I think an investor could realistically target a 5% yield in today’s market while staying laser-focused on company quality and share valuation.

Putting £200,000 into such a portfolio ought to produce an annualized second income of £10,000, with dividends rolling in within a matter of months.

Of course, few people have a spare £200k sitting around with no use for it. So a second approach towards the same end can involve starting from zero, making regular contributions, and reinvesting (compounding) dividends along the way.

Doing that with £500 each month and presuming the same 5% yield, within two decades the portfolio would be worth over £200,000. At a 5% yield, that would throw off more than £10,000 a year of second income – all for £500 a month, starting now.

Setting up a dealing account

Of course, the investor will need somewhere to put the money (whether as a lump sum or as regular contributions), ready to start buying shares.

So a useful first move would be to set up a share-dealing account, trading app, or Stocks and Shares ISA.

Getting ready to buy income shares

The investor also needs to look for the right sort of shares to buy.

Dividends (and therefore the second income) are never guaranteed to last. That is why I said above I think an investor ought to focus on very high-quality businesses with attractive share prices.

One share investors should consider with an eye on second income potential is financial services company Legal & General (LSE: LGEN).

The longstanding FTSE 100 member is a well-known firm with a long history. That, combined with its iconic branding and logo, helps it to attract and retain clients.

Legal & General has amply proven its business model over time, but of course times can change. One risk I see at the moment is that the sale of a large US insurance business, although positive for short-term cash flow, could reduce Legal & General’s long-term ability to generate free cash flows.

The company has reduced its targeted annual dividend growth per share from 5% to 2%. That is still growth, however. The last time the firm cut its dividend was following the 2008 financial crisis.

Its 8.4% yield is well ahead of the 5% target I mentioned above.

The post Here’s how to build a £10k+ second income from just 5 shares appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.