There are dozens of ways to earn passive income. Some take time to set up, but a few can be done swiftly. One such method — and a favourite of mine — involves dividends.
The beauty of owning dividend shares is that investors receive regular cashflow, typically on a quarterly basis. Some companies decide to reinvest their profits to spur future growth. And some decide to distribute a share of the profits to shareholders. For the largest passive income, I’d focus on the latter.
3-step passive income plan
First, I’d start by researching some high-dividend-paying companies. Many of these can be found in the FTSE 100. These large-cap shares are a good place to find reliable and stable dividend shares, in my opinion.
The average FTSE 100 dividend yield is currently around 3.7%. But some shares are paying up to 9% right now.
Bear in mind that there’s more to consider than just the yield. I’d also look at a company’s financial health and profitability.
Dividends are typically paid from earnings, so I want to ensure that my chosen companies can comfortably afford their anticipated payouts.
Diversification
Next, once I find some that meet my criteria, I’d build a diversified portfolio. Picking shares from different sectors and industries can reduce risk. It’s a clever strategy that can avoid putting all my eggs in one basket.
But I wouldn’t pick 100s of companies. If I wanted that many, I could just buy a Footsie index fund and earn 3.7% a year. That doesn’t strike me as appealing though. Instead, I’d narrow down the options and select between three and 10 stocks. One thing to bear in mind though. The fewer shares I own, the more risk I’d be taking.
For instance, by concentrating on three stocks, if something goes wrong at one of my companies, it could have an outsized impact on my portfolio.
Finally, I’d need to monitor my chosen shares. Dividends aren’t guaranteed, so I’d want to keep an eye anything that might impact them. That said, some companies have a multi-decade history of consistently paying out. This is where I’d put my focus.
Top picks
Given the recent FTSE 100 sell-off, some of my favourite dividend shares appear to be on sale. Share prices were marked down after Silicon Valley Bank collapsed over the weekend. But swift action from the authorities appears to have calmed the markets.
So which income shares should I pull the trigger on? If I didn’t already own enough dividend shares I’d buy Phoenix Group, Legal & General, Imperial Brands, Rio Tinto and Sainsbury’s.
This diversified group offers a 7% dividend yield, and a 23-year payout history. They’re all mature and established businesses. And all five have strong brands, relatively stable earnings, and solid cash flow.
To earn £1,000 of passive income a year from these shares, I calculate I’d just need to invest £14,286.
It’s not guaranteed, of course, but it still sounds good to me.
