Working for a living has its pros and cons. But a lot of people also like the idea of earning a second income on the side, without having to put in more hours at their main job.
I am trying to earn such additional income by building a portfolio of dividend shares. One of the things I like about that approach is that it does not require a lot of money to begin. In fact, I could start today with nothing and simply put aside £5 a day. Here is how I would go about it.
Saving a little and often
Putting aside a fiver each day seems doable to me. It is not some massive target that I would struggle to achieve the moment some other priority popped up.
But that does not mean it cannot still make a big difference to my income streams. A daily £5 adds up to £1,825 across the course of a year. I would invest that in dividend shares. Imagine the average dividend yield of the shares I buy is 5%. That should mean I earn just over £90 a year in extra income from my first year of regular saving.
That may not sound like much. But once I own the shares, I would be entitled to any dividends they paid for as long as I held them. So the money I save in year one of my plan could still be generating income for me in year two, year three and even year thirty!
As time passes, regular saving should mean I have bought more and more shares. So I would hopefully see my second income increase over the years.
Some practical points
If I had never invested before, buying shares might sound complicated. The reality is that millions of people invest in shares and it can be straightforward to set up a share-dealing account. In fact, that is something I would do on day one of my plan. I would then be ready to invest as soon as I had saved some funds and found shares I wanted to purchase.
What about the risks? Dividends are never guaranteed and shares can go down as well as up in value. That is why I would treat buying shares the same way as other new activities, from learning to drive to taking up boxing. First I would learn about how it works. Then I would spend time improving my knowledge and practicing in a low-risk environment.
For example, if I saw a share I liked such as Greggs or Wetherspoon, instead of buying it I might figure out what I thought it should be worth and then follow its fortunes for three months. I would try to learn from what happens in practice, and compare it to what I would have expected to happen. The more I learn, the better my investment choices could be.
Building a second income
When I was confident I was ready to make a move, I would start investing the money. I would begin by focussing on risk and buying shares I thought had limited downside rather than focusing on those I thought could do brilliantly.
The right balance of risk and reward could help me build my portfolio — and my second income.
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C Ruane has positions in JD Wetherspoon. 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.