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Money sitting in the bank can earn some more money, depending on interest rates. Over the long term though, my own approach to building a second income is to invest in blue-chip shares of proven companies that I hope can pay me dividends.
For the patient investor, such an approach can be lucrative. Here is how £20k could be used to target a £913 second income each month, on average.
Sticking to a basic approach
I ought to say upfront, by the way, that that monthly payout is after 25 years. As I said, this approach is for the patient. It could be used to build a second income stream faster (much faster, in fact) but at a lower level. Different investors will have their own priorities.
Although patience is part of the approach, apart from that it does not involve anything particularly demanding beyond the initial investment.
My preferred approach is to stick to well-established companies with proven businesses. Sometimes their share prices go nowhere for a long time, but by throwing off lots of spare cash they can fund generous dividends to reward shareholders.
Doing the maths
If an investor put £20k into the stock market and achieved an 8% compound annual growth rate (CAGR), after 25 years it ought to be worth almost £137k. At an 8% yield, that would equate to £913 a month.
That compound annual growth rate could come from either capital gain or dividends. But share prices can go up as well as down and dividends are never guaranteed to last. Clearly, careful selection of shares to buy is important.
However, in the current market, I think an 8% CAGR is realistic even while sticking to proven FTSE 100 blue-chip shares.
One share to consider
As an example, one share I think investors eyeing a second income should consider is FTSE 100 financial services giant Legal & General (LSE: LGEN). The company operates in a market with high demand that I expect to be resilient over time.
Thanks to a strong brand, large customer base and deep experience stretching back centuries, it has been consistently profitable in recent years.
Still, profits have been lower than before over the past several years and Legal & General has announced plans to grow its annual dividend per share at a lower level. Growth is still growth though, and the yield already stands at 9%.
One risk I see is profits falling due to the planned sale of a large American business. Over the long run though, I see Legal & General as a share for investors to consider.
Moving from dreams to action
This approach to earning a second income is straightforward, but it does require action!
A useful first step would be for someone to choose a share-dealing account, Stocks and Shares ISA or share-dealing app they can put the £20k into, ready to start investing. They can then look for shares to buy and build a second income, diversifying across a few different ones in case some disappoint.
