Image source: Getty Images
Earning a second income can take a variety of forms, from taking on an additional job to buying letting property,
One approach that appeals to me is investing in blue-chip shares I hope can pay me dividends in future.
Here are the three steps I would take to target a £3k annual second income from blue-chip dividend shares.
1. Getting ready to buy
Before I can buy any shares I need a way to do so. I would therefore begin by setting up a share-dealing account or Stocks and Shares ISA.
How much would I need to invest? Imagine I earned an average dividend yield of 7%. To earn £3k a year at that rate, I could invest just under £43,000 upfront.
But an alternative would be to drip feed money in and reinvest my dividends. Doing that with £500 a month, for example, I ought to hit my second income target in under six years.
2. Hunting for shares to buy
My next move would be to start hunting for shares to buy. I would look for companies I think have what it takes to generate significant excess cash they could use to fund a dividend.
Take Guinness brewer Diageo (LSE: DGE) as an example. It sells its premium tipples to a target market of drinkers I expect to remain substantial.
Unique assets from brands to product formulations can help it charge premium prices. That translates into sizeable profits that can be used to pay dividends.
Indeed, Diageo is what is known as a Dividend Aristocrat, having raised its shareholder payout annually for decades.
3. Aiming for a target
No dividend is ever guaranteed though. Diageo has been battling weaker demand in Latin America. A lacklustre economy could also hurt revenues and profits elsewhere.
I would still happily own it if I had spare cash to buy Diageo shares at the current price, but I would keep my portfolio diversified.
Diageo offers less than half of my target yield right now. Still, buying shares to try and build a second income is not just about focusing on yield.
My main focus would be buying into what I see as great companies selling at attractive valuations. Only then would I start to consider the yield offered by any given potential purchase.
If I could do that and hit my target yield, I think the idea of earning a £3,000 second income each year from the stock market could be a realistic one. Indeed, taking a long-term perspective on investing, I could hopefully grow my passive income streams from dividends beyond £3,000 each year over the course of time.
But that will not happen on its own. I need to take the right steps, starting with laying the groundwork and then finding shares to buy that can hopefully help me deliver on my goal.
