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 one job is already enough for most of us. But it is possible to earn a second income without taking up extra employment. To try and do that, my own preferred approach is buying shares.

Here is an example of how I could go about that with a spare £300 each month, to try and build up to an annual second income of £20,000 over time.

Save, forget, repeat

I have chosen £300 because it is big enough to help me move towards my goal while still being manageable. Everyone has their own financial situation, so others could save more than I am using in my example, while some would only choose to put away less each month.

The sum saved matters in the sense that the more cash invested, the sooner the end goal can be reached. But I also think what matters is getting into the habit of regular saving, whatever the amount.

So no matter much I felt I could comfortably manage to put aside, I would still try to get into a disciplined, regular habit. To do that, I would set up a share-dealing account, or Stocks and Shares ISA.

With a regular bank transfer, hopefully over time I would more or less forget that the money was going out of my account regularly. Instead, I could focus on the potential income I could generate by investing it.

Targeting extra income buying shares

Having saved the money, I would start putting it to work. The core of my extra income plan is buying shares I thought might pay me big dividends in future.

So I would look for companies with a distinctive, compelling business model in an industry I expect to see sizeable, resilient customer demand. For example, power will need to be distributed for decades to come – and it would be impossible to replicate the National Grid network from scratch.

But simply having a good business model on its own is not enough for me to invest. I also look at a company’s balance sheet to know what its debts are, as paying them could reduce the funds available for dividends.

On top of that, I consider a share’s valuation. If I overpay for a share, I might earn dividends from it, but see the paper value of my shares decline.

Time to start

The more research and thinking I do, hopefully the more likely I am to avoid some basic investing mistakes when building my portfolio. But I would still always diversify my portfolio, to limit the impact if some of my choices turned out poorly.

Putting in £300 a month, if I could achieve an average annual dividend yield of 5%, it would take me 38 years to earn an annual extra income of £20,000. Of course, my investments could lose value, which is always a risk. Although 38 years is a long timeframe, I would hopefully see my income grow over time as I kept saving and investing.

Within five years, for example, I should already be earning a four-figure annual second income. But to do that, I need to start!