Less than £10,000 to save? Here is how I would aim for a second income of £2,437

Working more hours each week is one way to try to earn a second income.

But my preference is to simply invest in stocks that one hopes will pay dividends to shareholders in the future.

If I had £10,000 in savings, I might have enough to continue that way. Here is an example based on an investment of £9,000.

Using money to generate dividends

First let me explain in detail how this method can help me build a second income.

When companies make more money they have more choices about what to do with it. They may create new industries, for example, or finance the takeover of a competitor.

Another use is to pay dividends to shareholders. Companies listed on the London stock market spent a lot of time £1bn a week on average last year it pays such dividends.

By simply buying a share in a company that pays dividends, I am entitled to any ordinary dividends it declares while I own it. However, shares are not guaranteed no matter what happened in the past, so I can divide my shares among many companies. My £9,000 would be enough to do that.

Creating large streams of income

I already love this show. If I could get an average annual dividend yield of 7%, for example, I would hope to earn 7% of my £9,000 each year: £630.

But I can try and earn more, while buying the same shares and still using my original investment of £9,000. To do that, I'll reinvest the dividends — a straightforward but potentially profitable investment move known as compounding.

If I compound £9,000 at 7% a year, for example, after 20 years I should have a share portfolio worth around £35,000. At a 7% yield, that portfolio size would be large enough to earn me around £2,437 as a second annual salary.

It starts today

Time can be an investor's friend, so I will start investing sooner rather than later as long as I can find income stocks to buy at a fair price.

There is one assignment that I hold that I think fits that mold in my opinion Legal & General (LSE: LGEN).

The financial services market is huge and I expect it to stay that way. Due to the focus on the retirement end of the market, legal and general benefits from long-term growth prospects, high cash flow and demand I expect to be strong.

It can use its strong brand and large customer base to try to make the most of its position. So far that has worked well – not only is the company consistently profitable, it also offers a 9.2% dividend yield.

I recognize the risk that turmoil in the financial markets may lead some customers to cancel their policies, hurting profits.

But I plan to hold my Legal & General shares in my Stocks and Dividends ISA for the foreseeable future – and hopefully build my second income.