There are a host of different ways people earn extra income.
One is buying shares in blue-chip FTSE 100 companies that pay dividends. I like that approach because it allows me to benefit from the hard work of successful enterprises, without having to work harder myself.
A Stocks and Shares ISA could be the perfect vehicle for me to implement such a scheme. If I had an empty ISA today, I could aim to use it over coming years to generate £18,000 annually in extra income.
Here’s how.
Simple but powerful
Looking at one of the most successful investors in history, Warren Buffett, something strikes me: the simplicity of his approach.
Buffett has invested heavily in household names like Apple and Coca-Cola. He has held those positions for years. That means he has benefitted from the sort of compound growth often associated over the long term with brilliant companies.
That has led to powerful financial returns for Buffett’s company, Berkshire Hathaway. But, at its core, it is a very simple approach.
Free cash
I could apply the same approach when it comes to investing my ISA.
By keeping things simple and keeping to proven businesses I think could generate substantial free cash flows in years to come, I think I could build a meaningful and growing extra income.
That would hopefully come in the form of dividends. Dividends are one way a company can choose to use its spare cash. As a shareholder, they are basically a form of free money. I buy the shares and then, for as long as I hold them, I get any dividends the company pays.
Finding great shares to buy
Not all shares pay dividends, however. Indeed, they are never guaranteed, so even a company that has repeatedly paid dividends in the past may elect not to do so in future.
That is why I would focus on finding companies I thought had a great business that could help them generate substantial free cash flow in future. In doing so, I would also consider their share price.
If I could find attractively priced shares in blue-chip companies with superb cash generation prospects, that might let me set up a future dividend stream.
Hitting the target
How could such a plan potentially earn me £18,000 per year?
First I would need to put money into my ISA. Then, I would invest it in dividend shares.
Imagine I put £20,000 each into my ISA then invested it in shares that yielded 8% on average. If I compounded (reinvested) those dividends, I ought to hit my annual target for extra income within nine years.
As a long-term investor, I would be fine with that timeline. The more immediate question for me would be how to start finding the sorts of high-quality shares with long-term dividend potential I described above!
