Buying shares and collecting regular dividends from them can help me build an extra income stream without having to take on new work. One way I could aim to do that is by investing in shares from the FTSE indices, such as the FTSE 100 or FTSE 250. These include most of the biggest companies listed on the London stock exchange, as judged by their market capitalisations.
Here is how I could drip feed £180 each month into FTSE shares with the target of generating £1,000 a year in dividends.
Why I buy FTSE shares
In my portfolio I have a variety of shares. But quite a few of them are in the FTSE 100, such as JD Sports and Standard Chartered. I also own some FTSE 250 members such as Safestore and Jupiter.
So, what attracts me to such FTSE shares? The answer is that I do not buy shares simply because they are in a FTSE index. Rather, I look at their long-term business prospects and, if I like what I see, consider whether their price is attractive to me.
An index like the FTSE 100 contains big, long-established blue-chips such as Diageo and HSBC. How have such companies come to get to such a size? In many cases, it is through decades of building a business that is uniquely well suited to the needs or wants of a large number of customers.
That is no guarantee that they will continue to be successful in future. But at a time like now, with a recession looming and the business environment looking challenging for many firms, I feel confident investing in companies that have proved their business models already, through good times and tough ones.
Dividend income opportunities
Given how mature some of these FTSE businesses are, it makes sense that many have limited investment needs to fund growth. So they can instead use surplus cash to pay out hefty dividends.
For example, I own a couple of tobacco makers from the FSTE 100. British American Tobacco has a dividend yield of 6.2% while rival Imperial Brands tops that at 8.4%.
But I do not simply go for the highest-yielding FTSE shares. For example, FTSE 100 miner Rio Tinto yields over 11%. But I am concerned about the risk to profits from the next metal pricing downturn so have chosen not to hold the share at this time.
Instead, I focus on exactly what I said before: finding great businesses trading at an attractive share price. Only then do I consider the dividend yield.
Targeting £1,000 a year
At the moment, the average FTSE 100 yield is 3.7%. So if I had a portfolio of just over £27,000 earning that average yield, I ought to be able to generate £1,000 per year in dividends.
Saving £180 per month, it would take me 12-and-a-half years to reach £27,000. But I could also use the power of compounding the dividends — reinvesting them in more shares. Doing that, I could hopefully have invested over £27,000 in just 11 years. That could let me hit my goal of £1,000 in annual dividend income.
