One way to build a second income is to build a portfolio of shares that pay dividends (or more accurately, which hope that they will pay dividends in the future).

It can be lucrative – but there are also possible traps. Here are four things that I think that an experienced second income hunter should consider using this approach.

Do: know what you are investing

It may sound obvious, but it is vital to know what you are buying. Otherwise, this is not an investment, only speculation.

Buying shares because they have a juicy dividend profitability without understanding the company, its balance and probably future cash flows (if they can be estimated) is pure speculation. It can be a costly mistake.

Do: Think about where future dividends come from

Understanding the company is vital for the investor for many reasons.

One of them is that dividends are never guaranteed, even if the company pays them constantly for years or even decades.

To continue to pay dividends, the company needs spare cash. He must also decide to spend this cash on dividends, and no other possible applications, such as business expansion or paying off your debt.

That is why free cash flows are so vital when it comes to dividends.

No: put all your eggs (and even most of them) in one basket

One of the common mistakes made by investors is to have too much of your portfolio in one action.

The problem is that even the best -acting company can encounter difficulties. This may mean that it must reduce or cancel his dividends.

Even worse, when the company lowers dividend, the price of shares often also decreases. It can be a double disappointment. If this share is too much part of your own portfolio, disappointment may mean an immediate decrease in the second income.

I understand why people make this mistake. To take British American Tobacco (LSE: Bats) as an example.

Not only did he keep the dividend to the action each year in this century, but also raised it. He has robust brands that give him price power.

. FTSE 100 The company is extremely generative, but with a decrease in sales of cigarettes it has confined applications in free cash (although it has a significant pile of debt to service).

All this means that investors should consider this for their future dividend potential.

However, people falling cigarettes are a risk of sales and profits. Inalienable sales are growing, but at the moment there is a lack of cigarette profitability.

So I think that investors should consider participation – but only as part of a different wallet.

No: unnecessarily burn the income

Some investors earn good shares with a second income, but then unnecessarily waste them due to transactions, commissions, account fees and so on.

That is why I think that it makes sense to review different options when it comes to choosing the best account, ISA shares and shares or application.