How I’m aiming to earn an amazing second income of £46,387 per year, starting from £2.50 per day.

I’m taking a second income from UK dividend shares to top up my state pension in retirement and I’m aiming high.

I think it is possible to earn a high and growing passive income by investing a small amount every day. Let’s say £2.50, less than the price of a coffee. The main thing is to maintain it in the long term.

I create a balanced portfolio consisting mainly of FTS 100 blue chip stocks that offer me a combination of dividend income and share price growth, as well as some smaller growth stocks from FTSE All-Share.

While I’m working, I reinvest every dividend I receive, which allows me to buy more shares. With any luck, they will pay me more dividends in the future, which will allow me to buy more shares that will pay more dividends… in an endless virtuous cycle.

I’m basing my pension on FTSE 100 shares.

I invest monthly by direct debit so I don’t think about the process too much. When I have free money, I invest more.

I focus on stocks that I can buy and hold for a long time so that my dividend income and stock price growth grow.

One FTSE 100 dividend growth stock that I would like to own, but unfortunately don’t, is Distribution Group. Diploma (LSE: DPLM).

It’s hardly a household name, which is perhaps not surprising since it produces unassuming industrial products such as seals, gaskets, filters, wiring and connectors for businesses in North America and Europe. It’s easy to overlook its dividend potential, given its modest trailing yield of 1.3%.

However, this is largely due to the sharp rise in stock prices. The stock is up 52.95% in 12 months. In five years it has grown by 170%.

Yield is calculated by dividing the dividend per share by the share price. Thus, if the price rises, the yield falls.

The stunning share price rise masks Diploma’s stellar dividend track record. Over the past decade, the board has increased dividend payouts by an average of 13.7% per year, according to the company. AJ Bell. The total return during this time will be 620.2%.

The dividend is not guaranteed, and AJ Bell forecasts it will grow at a slower rate going forward: 5.2% in 2024 and 5.4% in 2025. a new business takes time and does not always bring the expected results.

Watch those dividends grow

The average long-term total return of FTSE 100 shares is close to 8% per year. Let’s say I invested £2.50 a day for 30 years in a portfolio of 15-20 shares and got a return of 8%.

Let’s also assume that I increase my investment by 10% every year. In 30 years I’ll have an impressive £363,982.

If I took out just 4% of this amount each year (the so-called safe withdrawal rate), I would receive a second income of £14,559 per year.

The longer I invest, the better. If I could continue this for 40 years, I would get £1,159,674, more than three times as much. A 4% annual fee would give me a stunning second income of £46,387 a year.

Of course, dividends and stock price growth are never guaranteed. Stock markets can be volatile. My portfolio may underperform or outperform the FTSE 100 Index. Either way, I expect my £2.50 a day to turn into something substantial with minimal effort and sacrifice on my part.