Boosting my regular earnings with an additional income stream could help give me more financial independence. One way I already try to do that is by investing in dividend shares. If I wanted to target a weekly second income of £200 purely from investing in shares, here is how I could go about it.
Setting a savings target
How much I might earn in weekly income on average is a function of two things, the sum I invest and the overall dividend yield I earn.
For example, to earn an average of £200 per week (a total of £10,400 per year) from a share portfolio with a yield of 5%, I would need to invest £208,000. An alternative would be to put aside some money on a regular basis and build up to my target over time. The faster I save, the sooner I ought to be able to reach my target.
By putting my money into a share-dealing account, or Stocks and Shares ISA, I could start buying as soon as I had identified some businesses in which to invest.
Shares for a second income
But what sorts of stocks might offer me the kind of income prospects I am looking for? To pay out dividends consistently, a couple of things need to happen. First, a business must throw off spare cash. Secondly, it must decide to pay that out as dividends rather than retaining it in the business.
The second part is easier to determine, in my view. Many companies are clear about their dividend policy. For example, Google parent Alphabet does not currently pay out dividends, while Legal & General has a five-year plan that foresees annual dividend growth (though dividends are never guaranteed).
The harder part is trying to determine whether a company will throw off spare cash. I tend to look at whether it operates in a market I expect to experience ongoing strong demand, like Tesco in grocery retail, or SSE in electricity generation.
Next I consider whether the company has some competitive advantage that can help power profits, like the unique premium brands owned by Unilever, the patented pharmaceutical formulas of AstraZeneca or the proprietary distribution network of power distributor National Grid.
I also consider share price. After all, the yield I can earn from a share varies depending what I pay for it. On top of that, I do not want to buy overpriced shares. I could end up losing money, even though I receive dividends, if I sell the share for much less than I paid for it.
Putting a plan into action
My plan to generate a second income is pretty straightforward. I would put money into a selection of shares I have carefully chosen for their dividend generating potential and attractiveness overall. That could hopefully boost my earnings by a couple of hundred pounds each week on average without me needing to do any more work.
Without a lump sum, I can still aim for that target by saving regularly. It may take me many years to reach my goal, but even investing smaller sums using the same approach, I could hopefully build my income streams as I keep saving.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Tesco Plc, and Unilever 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.
Motley Fool UK 2023