The idea of earning some extra money without spending hours at work has always appealed to me. It’s called passive income and one of my favourite methods involves buying dividend shares.
Many companies pay part of their profits to shareholders in the form of dividends. These are often paid quarterly and in cash.
Regular passive income
One reason why I like this form of passive income is that it’s regular. Some of the best dividend shares have been consistently making payments for decades.
Over time, as profits grow, companies might decide to grow their payments too. Steadily rising passive income is most welcome. It can help to make up for the effects of high Inflation.
Popular investor Warren Buffett has benefited from dividend stocks for many years. His investment firm Berkshire Hathaway earns billions of dollars from the dividends of stocks bought several decades ago.
Bear in mind that dividends aren’t guaranteed though. Companies can suspend or cut payouts if earnings become uncertain.
That said, I’d focus on shares that have the best track record with consistent payments.
Which dividend shares?
The FTSE 100 index holds many suitable candidates for reliable passive income, in my opinion.
The average dividend yield is around 4%, but several shares pay much more. In fact, payouts can be as much as 18%. That’s enough to earn over £500 in passive income from a £3,000 investment.
Although that sounds appealing, I’d avoid buying shares that offer such a large dividend yield. That’s because they could be masking a temporarily depressed share price. Or it could be a sign of an upcoming cut to the dividend.
Instead, I’d look for shares that fall into my sweet spot range of 5% to 10%.
Finally, I prefer to own companies that can comfortably afford to pay their shareholders. One measure that I look at to determine this is dividend cover. This shows how much a business is earning relative to how much it’s expecting to pay in dividends.
Overall, several shares meet my criteria right now. If I had some extra cash, I’d consider buying Taylor Wimpey, Phoenix Group, Legal & General, British American Tobacco and SSE.
I reckon they could all provide consistent and reliable passive income in 2023. On average, this group of shares offers a 7% dividend yield and over 20 years of consistent payments.
Why now?
When looking for passive income from shares, I’d look at it as a long-term option. It’s not something that I’d do for just a few months.
Partly, that’s because share prices can fluctuate from short-term factors like news flow.
That said, many share prices are depressed at the moment. Times of recession can often cause share prices to fall. But I see that as an opportunity to pick up high-quality income shares at lower prices.
History shows that the economy should eventually recover. And when it does, I’d expect my investment to be worth more than it is today.
Added to all those dividends, a larger investment pot would be a welcome bonus.
