I’d invest £300 each month to target a £20,000 second income

No matter how hard one works, there are only so many hours in the day. That is not going to change! This helps explain why many people aim to create a second income by doing something other than taking on a side job.

My own approach is to build a portfolio of dividend-paying stocks that I can invest in to buy more stocks. Over time, I believe it can help create a substantial additional income stream.

I don’t need money to start, because I can set up a regular savings program and use it to start buying stocks.

As an example, this is how I can target an annual double income of £20,000 by investing £300 per month.

Get into the habit

I don’t have to pay £300 a month. The same approach can be used with £1,000 per month or £50. Although the speed at which I target my password will change accordingly, the basic principles apply no matter how much I invest.

I will invest the usual amount based on what suits my own financial situation. I will put the money into a mutual-account or a Stocks and Shares ISA. With regularity, I hope to develop investing habits that last for decades and help me build wealth.

Buy dividend stocks

Just having money in an investment account is not going to generate the second income I want. Instead, I will invest in stocks that I think will pay dividends in the future.

In doing so, I will follow four main rules.

The four rules of investing

First of all, I will only invest in businesses that I know. It is important because it gives me the ability to assess the prospects for the companies I invest in.

Secondly, I will only buy shares that I think have the potential to pay enough dividends for a long time to come. Past performance is not always indicative of what will happen next. So I look for businesses that have a competitive advantage in areas where I expect to see long-term customer demand, such as Unilever or National Grid.

Third, like any investor, I could be wrong. A company can be thrown out by some unexpected event, which causes it to cancel the dividend. So I’ve always created a lot of different companies.

And I pay attention to the price I pay for shares. If I overpay, then even if I get a juicy dividend, I can end up losing money from the investment.

Hit your second income goal

With that approach, I hope to make a profit.

Instead of using it as additional income, I will reinvest it so that I can get my own dividends. That’s known as compounding and it helps me reach my goals faster.

If I can achieve an overall average compound growth rate on the portfolio of 5%, investing £300 per month should yield an annual profit of £20,000 after 39 years.

That might seem like a long wait. But I can also decide not to join and just take the dividends as cash when they are paid. This way, hopefully, I will double my income in the years to come.