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The Motley Fool

A second income of £500 per month for £25 a week ? Here’s how.
Story by Christopher Ruane

Setting up additional income streams without having a second job could be a positive thing when it comes to personal finance. If I wanted to build a second income, I would aim to do so through investing in shares.

Even with a shorter timeframe, I think I could still aim to build up a more modest second income through this approach. Here’s how.

The basics

Shares are like a tiny sliver of a company. In this case I am not thinking about small companies like a local chemist or a car hire centre. Instead, my sights are set on the sorts of blue-chip businesses that sit in the benchmark FTSE 100 index of leading shares, or the smaller firms in the FTSE 250 index.

What I hope is that, by owning even a very minor piece of such firms, I can benefit from their business success when they pay out dividends.

I might make some bad choices or have unfortunate luck along the way, so I would invest in a range of companies to help reduce my risk.

Working towards a target

I could take any such dividends out as cash to give me a second income.

Imagine I earn an average yield of 8%. Investing £25 a week like that, I would already be earning £10 per week on average in dividends after five years.

The power of compounding

That is why, taking the long-term view, I would compound my dividends. That simply means reinvesting them in buying more shares.

Imagine I put the same amount away each week in identical shares to my above example, but compounded the dividends. After five years, my portfolio would be worth £7,900 and would generate an annual second income of £632.

But what if I could manage a higher average dividend yield, of 10%?

In that case, after 18 years of investing £25 weekly, my Stocks and Shares ISA would be throwing off £500 per month on average in dividends.

Finding high-quality shares that yield 10% is not easy. It takes time, effort, and research. But if I could manage to do it, my second income goal could come closer into view.