One elementary way to earn a second income is to build a portfolio of dividend stocks.

Not only does it involve little real work, but it can also be lucrative. Step by step, here’s how an investor could employ this strategy to channel £10,000 in passive income each year.

A lump sum is one way – but it’s not necessary

The dividend yield will depend on how much is invested and what the average dividend yield is.

For example, using a 5% dividend yield, $10,000. GBP in second income would require an investment of 200,000. GBP.

But an alternative method (and the one I employ) is to try and build to your goal over time making regular contributions to ISA.

Even £200 a week compounded at 5% per annum could lead to a portfolio worth £200,000. Sure, it would take 14 years. But as a long-term investor, this is music to my ears.

Finding stocks to buy

An investor could also accelerate if the compound annual growth rate (IE stock price movement plus any dividends) was higher than 5%. But dividends are never guaranteed – and share prices can fall as well as rise.

So I never choose a share just for its performance.

Rather, I try to find great companies that I believe have excellent long-term trading prospects that I feel are not adequately reflected in their current share price.

A tiny case study

This sounds good in theory, but what about practice?

Let me illustrate with an action I have: Footwear Specialist Crocs (NASDAQ:CROX). Over the past five years, Crocs’ stock price has risen 149%: far, far above my example of 5% per year.

I missed this gain as I am a fairly up-to-date shareholder. Thin. The thing is, even now the company trades at a price-to-earnings ratio of just 7.

This seems almost absurdly inexpensive to me considering the iconic brand and product, huge customer base, manufacturing management expertise and patented designs. I don’t like Crocs – but I know a great business model when I see one.

But if the company is so good, why is it selling at this price – and why is it down 36% since June?

Its acquisition Hey man The shoe brand has brought a lot of problems and is looking like an increasingly bad value.

It’s a risk of earnings. But I still think Crocs is a great business at a great price and stock ownership plan.

Preparing to invest

But wait. Crocs does not pay a dividend. So where does the second income come from in this scenario?

Recall above, I talked about a 200k portfolio. GBP invested with a yield of 5%. Unless it started with a lump sum, the investor does not have to invest in dividend stocks immediately.

They can employ a mix of dividend and growth stocks to build portfolio value. Then, at the £200,000 mark, they could switch to dividend shares.

If an investor diversifies and chooses the right shares, hopefully the £10,000 income will continue (and perhaps even grow) every year.

But they need a good way to buy and hold these shares, such as stocks and shares ISAs.