There are several ways to earn passive income, but some are more passive than others. Take buy-to-let property as an example. After making an initial investment, I could earn rental income. But it’ll still need significant input from me. I’d need to fix leaky taps, maintain the property and manage tenants.
One of my favourite methods to earn passive income is via dividend shares. After making an initial decision to purchase, it needs little involvement from me. As long as I pick well, I could watch my dividend income roll in for many years to come.
Finding the best dividend shares
But which dividend shares should I consider right now? Before I dive into my top picks, let’s look at some criteria. First, I’d want to see a greater-than-average dividend yield. The current FTSE 100 dividend yield is 3.6%, so I’d prefer to find shares that will give me more than that.
Second, I’d like to see a consistent track record of paying dividends. A company that has paid dividends for many years gives me more confidence than one that has started only recently.
Next, I want to ensure the payments are affordable for the company. For instance, does it generate enough earnings to at least cover its dividends.
Lastly, I’d like a company that’s on track to grow its earnings. If it can increase its profits over time, then I have more confidence that it’ll be able to raise my dividend income too.
Top picks
I’ve crunched the numbers to find the top dividend shares that meet my criteria right now. My favourites that I’d consider buying today are Rio Tinto, Phoenix Group, Vodafone, Aviva, BP, SSE and British American Tobacco.
All of these shares tick my boxes. They’re also established companies that I believe will still be thriving in years to come.
On average, my top seven pay a dividend yield of 6.5%. So if I invest £20,000, I should receive an annual £1,300 in passive income. That’s pretty good, in my opinion, especially considering the ultra-low interest rate I’d get via a savings account.
Issues to consider
But there are some issues to consider. Investing in dividend shares doesn’t guarantee the value of my investment won’t go down. That said, it gives me some comfort that my top seven shares achieved a 6.9% annual return over the past decade.
One thing to bear in mind is also that these shares aren’t growth stocks. Their share prices are unlikely to grow by double-digits every year. But at the same time, I don’t think they’ll lose all of my money either.
Balanced across several industries, I’d say it’s a diversified group. This spreads my risk so that I don’t have all of my eggs in one basket. Overall, I’d be happy adding all seven picks to my Stocks and Shares ISA this year.
