I’d use the next 10 years to build a £10,000 second income

Work, work, work is not always the same as pay, pay, pay. But even then, there is a limit to how much work you can do or want to do. That’s why if I want to build a second income, I will try to get it by investing in dividend stocks.

Here’s an example of how I can use this approach over the coming decade to target an extra £10,000 a year in income.

Dividend share

When a company makes a profit, they have to decide what to do with it. Some are able to pay off debt or reinvest in the business. But the rest will be shared with shareholders, by paying what is called a dividend.

I have a stake in it FTSE 100 such companies British American Tobacco and M&G which pays dividends. This is never guaranteed. But they can be substantial. Indeed, regular dividend streams form the basis of my plan to generate double income.

To move, I need to decide what stocks to buy – but I also need money to invest. Instead of doing everything at once, I can contribute regular amounts over time and build an investment fund.

For example, imagine I earn an average annual dividend yield of 5% on my portfolio. By investing £1,300 a month and compounding dividends, after ten years, I should have a portfolio worth more than £200,000, earning a double annual income of £10,000.

Do the math

The example above assumes a fixed stock price and dividend yield, but in reality, both can move. Dividends can go down, although they can also go up. Indeed, I mentioned above that I own British American Tobacco and its dividend has grown every year for over twenty years.

Investing £1,300 may seem like a lot of money to pay each month. But if necessary, I can change the amount to match my own financial situation. But that will affect the annual income target I can hit after 10 years.

Going for quality

Why am I using 5% as a yield example? After all, some stocks offer more, in some cases more. Over time, a well-run company may increase its payout. This may mean that the yield based on my initial purchase price will be higher.

I estimate an average return of 5% in the current market while sticking to high-quality blue-chip stocks. But I won’t start by looking at the stock’s current results. After all, no dividend is guaranteed.

Instead, I focus on finding great businesses where I have some competitive advantage that can translate into long-term profits. If I find them, I then consider the prospect of dividends. By identifying these stocks and building a diversified portfolio, I hope to double my income over the next decade.