Investing in shares is a common way to earn some extra income. But how much could I actually hope to make by putting money aside regularly to invest in the stock market?
What drives stock market returns
If I buy shares, I could earn money in one of two ways.
The first is a movement in the share price. For example, if I buy a share that costs £1 and it moves to £2, I would double my money. But that only happens if I sell the shares. If I hold on to them, the changing price is a paper gain but I would not yet have made money.
A second way to earn money from shares can pay me even as I continue to own them. Such payments are known as dividends. These are basically a distribution made by a company to shareholders. Such dividends are never guaranteed, but a company that routinely generates enough excess cash is often in a strong position to pay dividends if it chooses to do so.
If extra income is my objective, therefore, I would focus my investing on dividend shares.
Likely returns
If I put £30 weekly into shares, how much dividend income might I earn?
The answer depends on what is known as dividend yield. As an example, the current yield for Tesco stock is 4.1%. That means that if I spent £100 on Tesco shares today I would hopefully earn £4.10 in dividends in the coming year.
£30 a week adds up to £1,560 over the course of a year. At a 4.1% yield, that would generate £64 for me in dividends next year.
But what if Tesco did not pay dividends? It has cut its payout before and could do so again. Indeed, so could any company.
I would mitigate such a risk by diversifying my portfolio across a range of businesses. Crucially I would focus on investing in what I think are great businesses with attractive share prices.
Building income streams
As extra income goes, £64 a year would be welcome but it would not make a dramatic change to my lifestyle.
Yet I could boost that income in a couple of ways.
One would be achieving a higher yield than the 4.1% of my example. I invest first and foremost based on the quality of the business and its valuation. Yield alone does not make me buy a share. However, I do own some shares paying out well above 4.1% (British American Tobacco and M&G are examples) and that I still consider as meeting my investment criteria.
I could also aim to boost my extra income simply by sticking with my plan.
Over time, the weekly £30 would add up. In the second year, for example, not only could I be earning dividends from newly purchased shares – hopefully I would also be receiving payments from shares I bought in the prior year.
With such a long-term approach to investing, as the years go by my extra income could start piling up.
