Want a second income? Here’s how a spare £3k today could earn £3k annually in years to come!
Earning a second income through owning dividend shares is hardly a new idea.
But is it realistic to expect that such an approach could generate an income every year, down the line, as big as the initial investment?
It is â but it depends on how patient the person seeking the second income is.
Earning income from dividend shares
Let me explain.
Imagine somebody invests £3k today at a 7% dividend yield (meaning they earn £7 for every £100 invested).
Next year (and every year if the shares in their portfolio maintain their dividends, which is never guaranteed), they ought to earn a second income of £210.
But instead of taking the dividends next year, they could reinvest them â something known as compounding.
Matching income objectives to timelines
If they do that for five years, their portfolio ought to be big enough to earn around £275 per year of dividends.
If they waited for a decade before drawing the dividends as a second income, it would be £386 per year. After 25 years, it would be into four figures.
After 41 years, that initial £3k compounded at 7% annually would be big enough to earn over £3k per year as a second income.
Tailoring the approach
As you can see, long-term investing can potentially have substantial benefits (depending on what you invest in!)
But not everyone would want to wait over four decades to start earning the dividend income. I understand that.
In fact, that is one of the things I like about investing in blue-chip dividend shares as a way to earn a second income: the flexibility.
Someone can choose their own timeline and how much they want to put in. They can also select their own target income and what shares they want to buy.
Of course there are possible compromises: the shorter the timeline before one starts drawing the dividends as income, the smaller the income may be.
But the flexibility of this sort of second income plan stands in stark contrast to something like taking on an additional job and needing to clock in and out on time, every time!
Selecting shares with strong dividend prospects
There are some practicalities to consider, of course.
One is setting up a way to buy and hold shares and receive or reinvest any dividends. That might be a share-dealing account, Stocks and Shares ISA, or trading app, for example.
Next comes choosing a suitably diversified portfolio of dividend shares.
One share I think is worth income investors considering is asset manager M&G (LSE: MNG).
In my example above, I used a 7% figure. M&G actually yields 7.1% at the moment.
The company also aims to grow its dividend per share each year.
With its powerful brand name, customer base in the millions, and operations spread around the globe, I think the company has a strong set of competitive advantages. They could potentially help it generate enough cash to keep growing its dividend.
But there are risks too. One I see is policyholders pulling out more money than they put in, for example because of turbulent financial markets.
Still, on balance, I think M&Gâs long-term income generation potential is strong.
The post Want a second income? Hereâs how a spare £3k today could earn £3k annually in years to come! 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 recommended M&g Plc. 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.
