A £13,607 annual second income for £500 per month? Here’s how it can be done

Does earning a second income necessarily involve working more?

Definitely not! In fact, many people earn a second income by building up a portfolio of shares that pay them dividends.

Doing that does not require an initial lump sum of money. It is possible to start from scratch, by putting aside a certain amount of money each month to invest in shares.

How much will vary, depending on a person’s individual financial circumstances. In fact, that sort of flexibility is one of the things I like about buying dividend shares as a way to try and earn a second income.

Here’s what the income streams could look like

To illustrate this approach in practice, imagine somebody invests £500 per month for 20 years, compounding it annually at 6%.

At the end of that period, the portfolio ought to be large enough that a 6% dividend yield would equate to an annual second income of £13,607.

Building wealth with blue-chip shares

That initial 6% compound annual growth rate could come from capital gains, dividends, or both.

But it is important to remember that share prices can go down as well as up – and dividends are never guaranteed.

So, careful selection of the right shares to buy and hold is important. I like to focus mainly on blue-chip companies with proven business models I think have an enduring competitive advantage – and only when I can buy them at an attractive price.

Getting ready to invest

It is possible to earn the dividend income without waiting, by the way. Someone could simply take the dividends as they are paid, without reinvesting them.

That could mean they earn a second income sooner. But it would be correspondingly smaller than if they compounded the dividends over the course of two decades.

Either way, they will need a practical way to buy shares. So a good start to putting the second income plan into practice would be to set up a share-dealing account, Stocks and Shares ISA, or trading app.

On the hunt for quality shares

Just because someone puts in £500 per month does not mean that it needs to be invested immediately. They can build up cash until they find what they think are the right shares for them to buy – and at the right price.

One UK share I think is worth considering right now for its income potential is Pets at Home (LSE: PETS).

It offers a juicy 5.7% dividend yield.

The share price has fallen 42% in five years. Just because a share falls does not necessarily mean that it will recover that lost ground. But I see Pets at Home as offering an attractive valuation for a solid business.

The fall partly reflects challenges in the company’s retail arm. I think there is an ongoing risk that that could hurt performance, unless management can get the right assortment of goods and offer them at the optimal price.

However, the retail business remains large and I think it can be put back onto a growth track. Meanwhile, the company’s group of vet practices is growing handily and could keep doing so.

With a large customer base and loyalty scheme, well-known brand, and ongoing customer demand, I reckon Pets at Home could merit a higher valuation than its current one.

The post A £13,607 annual second income for £500 per month? Here’s how it can be done appeared first on The Motley Fool UK.

More reading

• How much does it really cost to build a big enough SIPP for retirement?
• How big a Stocks and Shares ISA is needed to earn a £500 monthly passive income?
• How big an ISA does it take to generate a £1,000 monthly second income?

C Ruane has positions in Pets At Home Group Plc. The Motley Fool UK has recommended Pets At Home 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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