How I’d invest £300 a month in UK shares to target an extra income of £20,000 per year

Some extra income can always come in handy. But working on one job is enough for most of us. But it is possible to earn a second income without taking up additional employment. To try and do that, my own preferred approach is to buy stocks.

Here’s an example of how I could do it by saving £300 a month, to try and make an annual double income of £20,000 over time.

Save, forget, repeat

I’ve chosen £300 because it’s big enough to help me move towards my goals while still being manageable. Everyone has their own financial situation, so others may save more than I used in my example, while some simply choose to put less away each month.

The amount you save is important because the more cash you invest, the faster your end goal can be achieved. But I also think it’s important to get into the habit of saving regularly, no matter the amount.

So no matter if I feel like I can get rid of it, I will still try to stick to a disciplined and regular habit. To do this I set up a stock trading account, or Stocks and Shares ISA.

With regular bank transfers, hopefully over time I’ll forget that the money is coming out of my account on a regular basis. Instead, I can focus on the potential income that I can make by investing.

After saving the money, I will start working on it. The core of my supplemental income plan is to buy stocks that I think can pay big dividends in the future.

So, I will look for companies with a distinctive and interesting business model in an industry where I expect to see large and resilient customer demand. For example, power must be distributed for decades to come – and it is impossible to replicate National Grid network from scratch.

But just having a good business model alone is not enough for me to invest. I also look at the company’s balance sheet to understand what the debt is, because paying it can reduce the funds available for dividends.

On top of that, I consider the value of the stock. If I overpay for shares, I can get dividends from it, but see the paper value of my shares decline.

Time to start

The more research and thought I put into it, the more I can hopefully avoid some basic investment mistakes when building my portfolio. But I will always diversify my portfolio, to limit the impact if some of my choices turn out to be bad.

Investing £300 a month, if I can get an average annual dividend yield of 5%, it will take me 38 years to earn an additional annual income of £20,000. Of course, my investment could lose value, which is always a risk. Although 38 years is a long time, I expect to see my income grow over time as I continue to save and invest.

In five years, for example, I should have earned a four-figure annual income. But to do that, I have to start!