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

However, I prefer the approach of simply investing in stocks that I hope will pay dividends to shareholders in the future.

If I had less than £10,000 in savings, I might still have enough to continue with this approach. Here is an example based on an investment of £9,000.

Using cash to generate dividends

First, let me explain in more detail how this approach can assist me build a second income.

When companies generate excess cash, they have many choices about what to do with it. For example, they can build recent factories or finance the takeover of a rival.

One application is the payment of dividends to shareholders. Companies listed on the London Stock Exchange spent significantly more £1 billion a week paid such a dividend on average last year.

By simply purchasing shares in a dividend-paying company, I am entitled to any ordinary dividends declared by that company during the time I own them. Still, dividends are never guaranteed, no matter what has happened in the past, so I would diversify my holdings across several companies. My £9,000 would cover that.

Building larger passive income streams

I already like this plan. If I could achieve an average annual dividend yield of 7%, for example, I would hopefully be earning 7% on my £9,000 a year: £630.

However, I could try to make even more by buying the same shares and still using my original £9,000 investment. To do this, I would reinvest the dividends – a plain but potentially lucrative investment move known as compounding.

For example, if I earned £9,000 at an interest rate of 7% a year, after 20 years I should have a share portfolio worth almost £35,000. At a yield of 7%, this portfolio size would be vast enough to earn around £2,437 as a second annual income.

Starting today

Time can be an investor’s friend, so I would start investing sooner rather than later if I can find high-quality income stocks that I can buy at the right price.

One stock I own that fits this mold from my perspective is Legal and general information (LSE: LGEN).

The financial services market is vast and I hope it will remain so. By focusing on the pensions market, Legal & General benefits from long-term growth prospects, powerful cash flow and demand that I believe will be resilient.

It can leverage its powerful brand and vast customer base to make the most of its position. So far, this has worked well – not only is the company consistently profitable, but it also has a dividend yield of 9.2%.

I see a risk that financial market turmoil could cause some customers to terminate their policies, hurting profits.

However, I plan to keep my Legal & General shares in my Stocks and Shares ISA for the foreseeable future – and hopefully build my second income.