5 steps to target a £5,000 second income

Earning a second income by investing in blue-chip dividend shares is a common approach for people to try and have more cash without needing to do more work for it.

How might it work? Here is how someone could set up a second income plan, in five steps.

1. Start putting money aside

The first step would be to start putting money aside on a regular basis.

How much depends on what someone can spare. In this example I will use £500 a month. The same approach could work with less or more, but would be correspondingly slower or faster.

Buying shares will require an account, so it makes sense from day one to start putting the money into one, such as a share-dealing account, Stocks and Shares ISA, or trading app.

2. Get to grips with how the stock market works

If this approach was as simple as putting money into shares that pay dividends, that would make it easy. The reality is a bit more complex.

Dividends are never guaranteed. As well as that, share price moves can mean that even a share that pays dividends turns out to lose money over the course of ownership.

So, before investing, it is helpful to become familiar with at least the key elements of how the stock market works – things like how to value shares and how to manage risks.

3. Begin to build a portfolio

At some point, the investor is ready actually to invest!

In my example, I presume a compound annual gain of 8%. That does not necessarily mean an 8% dividend yield – share price gains can also contribute, though to my point above, share price declines could eat into the compound annual gain.

One share I think investors should consider at the moment is Hollywood Bowl (LSE: BOWL).

The leisure site operator offers a 5% dividend yield. Over time I expect the dividend to keep growing, as the proven and profitable business aims to keep growing its number of bowling alleys in coming years.

Hollywood Bowl’s share price has gained 30% over the past five years.

I also like the growth story of its plans in Canada, where it already has a footprint and sees lots of opportunity to expand by buying existing single-site operators.

The economics of a bowling lane can be attractive. They are pretty cheap to maintain. Once someone is through the door, as well as lane hire there are other revenue opportunities like snacks and drinks.

One risk I see is the company’s North American expansion plans distracting management from the core UK business.

But over the long run, I see this as a simple, but proven, cash generative business with sizeable growth potential.

4. Keep on going…

So, is there a second income yet?

Not for a while, if dividends are initially reinvested as I presumed when I included them in the 8% compound annual growth rate.

A long-term approach to investing is required. Putting in £500 a month and compounding it at 8% annually, after 13 years it ought to be worth around £133,700.

5. Turn on the income taps!

At that point, the dividends could be used as a second income.

An 8% dividend yield on that £133,700 would generate over £500 per month on average.

The post 5 steps to target a £5,000 second income 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 Hollywood Bowl Group 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.

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