Here’s how an investor can start building a £10,000 second income with £180 a month by 2025

With expenses that can pile up this time of year, the idea of ​​a second income can seem even more appealing than usual.

Earning a second income does not necessarily mean having a second job.

Another common way for people to earn extra money without working for it is by investing in dividend-paying stocks.

Understanding the basics of dividend stocks

Not all stocks pay dividends. Even if someone does, stop anytime. For example, Card Industry announced this week that the cost base of its business has been hit hard by the Budget and it plans to liquidate its dividend.

Therefore, when I buy income stocks, I try to find those that I think can maintain or increase their dividends – but I spread my selection over many companies, as the unexpected can always happen.

How much I earn in a second salary depends on the amount of dividends I receive per share.

If I invest £1,000 in shares yielding 5%, for example, I can hopefully earn £50 a year in dividends (although as I explained above, that could end up being less – or more).

Finding stocks to buy

But just looking at the yield can be a cup game. It is important to understand how likely it is that the company will be able to support a certain level of profit in the future – and whether paying dividends is in line with the company’s strategy.

After all, excess cash can be used in other ways, from investing for growth to building savings or buying stocks.

So I look for companies with a large market cap, competitive profitability, and the potential to generate significant free cash flow to fund dividends.

One high yield share I have

As an example, I can point to one share in my portfolio: IM&G (LSE: MNG).

I FTSE 100 A property manager operates in a large global industry and is likely to remain so for the foreseeable future. Because of its well-known brand, large customer base spread across various markets, and deep knowledge of financial markets, I consider M&G to have a competitive advantage.

It has proven to be able to generate significant free cash flow and has supported a large dividend that has been growing in recent years. Currently, M&G’s yield is 10.1 %.

Can that last?

One of my concerns is the risk that economic instability and weak growth could lead to investors withdrawing funds. M&G customers (excluding its Heritage division) took out more money than they put in their wallets in the first quarter.

However, at the moment, I have no plans to sell my shares.

Creating large dividend streams

That 10.1% yield is significantly higher than the FTSE 100 average of 3.6%.

But even achieving a very low average yield – say 6% – I think a long-term investor can target a second annual income of £10k.

Investing £180 a month and compounding at 6% per annum, the portfolio should be worth more than £168,000 after 29 years. At a 6% yield, that would generate over £10k a year in dividends.

An investor can start generating secondary income immediately by switching from holdings to cash dividends, but the value will be lower.