Interested in a second income stream? Here's how to build one

So you're interested in a second income stream? It sounds pretty appealing, doesn't it? What would it mean to you? An early retirement, a larger house, or more time on the beach?

The good news, is that in 2018, generating a second stream income stream has never been easier. There are literally thousands of ways that you can now generate extra cashflow. For example, many people now rent out spare bedrooms on Airbnb. This can bring in a fair amount of cash. Others drive for Uber in their spare time.

Building up multiple income streams is something I've been working on myself over the past few years. I've tried several different ways of generating extra cash, from creating my own websites to picking up freelance writing work on the side. While these strategies have been successful and added to my bank balance, there's one strategy in particular that I've found to be more effective than the rest. That's because, once you're started, it literally requires zero effort. You just receive pay cheque after pay cheque.

What is this magical source of second income? Dividend stocks.

Make money while you sleep

The beauty of dividend investing is that you collect pay cheques for doing absolutely nothing. With Airbnb, you constantly have to welcome new guests and clean up their mess. With a personal website, you need to create regular fresh content for your readers.

However, with dividend stocks, you can literally spend a month on the beach, and you'll still get paid. Dividend stocks really are an amazing way to generate passive income - the Holy Grail of financial independence. It's also very easy to get started.

Follow these rules

Dividend investing doesn't need to be complicated. Anyone is capable of building a second income stream through a diversified portfolio of income-generating stocks. Having said that, there are a couple of things you should look for when picking stocks for their cash payouts.

Obviously, a high yield is a good place to start. The higher the yield the more cash you'll receive. However, it can pay to avoid super high yields (7%+), as this can signal danger. I find the sweet spot is around 4% and 5%.

Always check a stock's dividend coverage ratio. This indicates whether the company can actually afford to pay its dividend. Simply divide earnings per share by dividends per share to get the ratio. Ideally, you want coverage of close to two.

Next, look for companies that are growing their dividends. A dividend payout that is rising is considerably more valuable than one that is static. For example, if you can find a company that has a 4% yield that is growing at 10% per year, within five years your yield will be close to 6.5%. That translates to more cash for you.

Lastly, go for companies that are in good financial shape. Look for factors such as rising revenues, low levels of debt, and strong industry tailwinds.

Put together a diversified portfolio of this kind of stocks, and before you know it, you'll be receiving regular cash payments on a monthly basis, even while you're on holiday. To my mind, using dividend stocks to build a second income stream is a no-brainer.

Five 'world-class' dividend stocks listed in this report

If you're looking for high-quality, buy-and-hold dividend stocks, I'd recommend downloading our report Five Shares to Retire On.

The report lists five FTSE 100 companies that all pay big dividends.

Better still, it's FREE. To pick up your copy, simply click here.

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