The idea of earning some additional money can be appealing – but less so if it involves me doing a lot more work. That is why one of my favourite ways to generate some extra income on a regular basis is investing in shares that pay dividends.
Doing that does not need me to work. I could begin even without money saved up in advance. Here is how I would put such a plan into action, for £5 a day.
The power of regular saving
While £5 a day may not sound like much, it can soon add up.
Over the course of a year, putting that much aside each day would give me over £1,800 to invest in shares. That could help form the basis of my dividend income.
To start, I would get into the habit of contributing regularly to a share-dealing account or Stocks and Shares ISA.
Learning about earning
But how could that lead me to extra income?
Dividends are like a share of profits a company pays out with shareholders. That means they are not guaranteed. A company may see its profits fall and cut its dividend, as Shell did a couple of years ago. Or it may focus on growth, keeping the profits in the business rather than divvying them up.
So I would hunt for shares in companies I expected (or at least hoped) may pay dividends in future. How would I make such a choice? To start, I would try to find companies with business models I understood that I felt could be a source of long-term profits. For example, Johnnie Walker manufacturer Diageo has strong brands that give it pricing power. I expect future customer demand for spirits to be robust.
By learning more about what helps companies pay out dividends year after year – Diageo has raised its payout annually for over three decades – hopefully I could find some that match my investment objectives.
Finding dividend shares to buy
But I could be wrong. For example, falling beer sales could lead to reduced profits at Diageo, which owns Guinness as well as spirits brands. So I would invest across a diversified portfolio of companies.
Just as I would not buy a great car if I felt it was overpriced, I also think it would be a mistake to pay too much money even for shares in a brilliant company. I would therefore consider valuation when making share purchases for my plan.
Extra income expectations
Saving and investing like that over time, I would hopefully generate extra income.
If I invest my money in a portfolio of shares with an average dividend yield of 5%, I ought to earn just over £90 in dividends from my first year of saving.
If I am fortunate, the shares I buy will keep paying me dividends. Along with saving money consistently, that can help me keep building my portfolio. So the extra income streams it generates would hopefully increase over the years.
