You don’t need huge amounts of cash to start working towards earning a second income. Even starting from scratch, it’s possible to do a lot.
The key lies in a combination of dividend stocks and the power of compound interest. But the most important thing is consistency.
Dividend stocks
The stock market lets investors own shares in businesses that can choose what to do with their profits. And some return it to investors as dividends.
Whether or not this is the right decision depends on the company. In some cases, investing it internally can be a better move.
Sometimes, companies have opportunities to open new venues, develop new products, or acquire other businesses. But this costs money.
When a firm can get a good return on the cash it uses, it creates more value for shareholders. So dividends aren’t always the right choice.
In some cases, though, businesses either don’t have the scope to grow or don’t need cash to do so. And then dividends make sense.
Owning shares in these companies can be a great way of earning passive income. In the best cases, it can even grow over time.
Starting from scratch
Ultimately, earning a big second income involves investing quite a bit of cash. But that doesn’t have to happen on day one.
Putting aside part of a monthly salary is a really good approach. It takes time to build a portfolio, but the results can be very impressive.
I think a 7.5% annual return is a realistic target. There are no guarantees, but I’ll come back to why I think this is plausible.
Reinvesting dividends at this rate can turn £250 a month into a £1,500 annual second income within seven years. But things kick on from there.
Within 15 years, the returns grow to £4,672. And after 30 years, investors could be looking at a monthly £1,500 second income.
That’s a nice situation to be in. But this depends on finding opportunities to earn 7.5% a year, so the big question is how to do this.
Supermarkets
One stock that comes with a 7.5% dividend yield is Supermarket Income REIT (LSE:SUPR). It makes money by leasing a portfolio of retail properties.
The firm generates a lot of its income from Tesco and Sainsbury. That’s not a big surprise, but it does create risk.
Both companies are reliable payers. But if either decides to go in a different direction, they could be tough to negotiate with.
Supermarket Income REIT is – as the name suggests – a real estate investment trust (REIT). That means it has to distribute 90% of its income as dividends.
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Growth opportunities can be limited as a result. But leases do include inflation uplifts, so investors shouldn’t lose out on that score.
Investors looking for a 7.5% dividend yield don’t have unlimited choices. This, however, might be one of the best to consider right now.
Getting started
Building a second income stream doesn’t take huge amounts of cash – at least not at first. What it does take, however, is time.
That means getting started as soon as possible is very important. And I think there are opportunities right now for investors who can find them.
