The prospect of boosting earnings appeals to a lot of people. What can be less appealing is the work that normally goes with it. That is why my preferred approach to trying to top up my finances with some extra income is investing in dividend shares.
That approach can work with a small amount of money – and have longlasting benefits. Here, I explain some key points of my plan.
Dividend shares as a source of extra income
The principle behind dividends is not complicated. Companies conduct their business to try and make profit. If they are successful, they might need to use some of that profit for things like building new factories, investing in costly product development, or paying off loans.
Should you invest £1,000 in Lloyds Banking Group right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?
But if there is cash left over, the company can choose to pay it out to shareholders. That is what we call a dividend. Such dividends are never guaranteed. But some companies have been paying them every year for decades. For example, not only has Scottish Mortgage Investment Trust been paying a dividend out for decades, it has also not cut the size of its yearly payout since before the war.
Investing in shares
So how could I get some of these dividends to give me extra income? To receive a dividend, an investor needs to own at least one share in the company that pays it.
But as dividends are never guaranteed and there is also a risk of capital loss if share prices go down, I would never invest my money in just one company, no matter how brilliant I felt its prospects might be. Instead, I would build a diversified portfolio of shares in a variety of industries.
That requires money and this is where the £30 a week comes in. That may not sound like much in a stock market that sees billions of pounds worth of shares traded on a daily basis. But, over time, £30 each week would add up. It would give me over £1,500 a year to invest.
To try and stick to my plan, I would set an achievable target. That £30 works for me, but other people may invest more or less. I would also set up a share-dealing account, or Stocks and Shares ISA to give me the practical ability to buy shares.
Finding shares to buy
What shares would I buy? I would hunt for companies I felt had a competitive advantage in an industry I expect to benefit from enduring customer demand.
But the price I pay matters as well as what I buy. So I would seek to purchase shares trading at an attractive price. The price also helps determine a share’s dividend yield – basically its annual dividend expressed as a percentage of my cost for the share.
If I buy shares that keep paying dividends and hold them for the long term, I could be earning extra income year after year. If the average yield on my portfolio is 5%, for example, I should hopefully earn £78 in extra income each year from my first 12 months of investing. Over time, if I keep investing and the companies I own maintain their dividends, I ought to see my income grow.
