£20,000 in savings? Here’s how that could be used to aim for a £23,657 annual second income

Want to earn a second income without taking on a second job?

In fact, there are multiple ways people earn a second income – and working more hours is only one of them. Another is building a portfolio of dividend-paying shares in well-established, profitable companies.

Building up serious income streams

That could turn out to be a lucrative approach to setting up a second income, for someone who is willing to adopt a long-term approach. If someone put £20,000 into shares today and was able to compound the portfolio’s value at 8% annually, after 35 years it would be worth almost £296k. At an 8% dividend yield, that would make for a second income of some £23,657 a year.

Dividends can be lucrative, but aren’t guaranteed

That compound growth rate is based on dividends and share price growth, though share price falls could eat into it.

When it comes to dividends, they are never guaranteed. An 8% yield is over double the current FTSE 100 yield. However, with a careful selection across a range of shares, I think it is an achievable target in today’s market.

Getting on the right track

First things first. Before choosing any shares to buy with the £20k, an investor needs a way to do so.

So they ought to set up some sort of means of share dealing. That could be a share dealing account, Stocks and Shares ISA or trading app.

Finding dividend shares to buy

Having done that and educated themselves about key stock market concepts like share valuation and how dividends are funded, an investor should be ready to start constructing their portfolio designed to generate a second income over the long term.

One share I think investors should consider is FTSE 100 insurer Phoenix Group (LSE: PHNX). The company owns brands such as Standard Life and SunLife.

Phoenix is not a household name, but it is a more sizeable force in the pensions and retirement industry than many people may realise, with around 12m customers.

The market for retirement-linked financial products is large and I expect it to stay that way. The large sums of money involved mean that it can be a lucrative business area. That helps explain why Phoenix, with its large customer base and deep expertise, has been able to generate sizeable sums of money operating in this field.

In fact, Phoenix is so confident about its long-term cash generation potential that it aims to maintain its recent track record of growing its dividend per share annually.

That comes on top of an already juicy dividend yield, currently standing at 7.9%.

Can the company deliver on its ambition? One risk I see is its mortgage book. If the property market enters a rocky period and valuations need to be written down, that could hurt earnings at Phoenix.

Still, the second income plan I outlined above is based on a long-term approach. From a long-term perspective, I see Phoenix as a share for investors to consider.