One of my favourite ways to earn passive income is from dividend shares. Many UK shares pay dividends but some pay more than others. Currently, the average FTSE 100 dividend yield is 3.7%. I’d rather receive that than the minimal interest I’d get in a bank savings account.
There are some factors to consider though. Investing in shares involves taking more risk than putting my money in the bank. Share prices can fall as well as rise, as can dividend payments. But by picking a few quality shares that have a good dividend record, strong balance sheet, and reasonable outlook, I’d aim to build a decent passive income.
Property vs shares
I’m often asked about passive income from property vs shares. In some ways they’re quite similar. As a property investor, I’d receive income in the form of rent. That’s like the income I’d receive from share dividends. The price of my property tends to rise over time, just like I’d expect the value of my shares do too. And just like a property would achieve differing rents dependent on location and tenant demand, shares distribute varying amounts of dividends depending on the business.
There is one key difference though. I’d need to invest a much larger sum to buy a property, whereas I could start receiving passive income from shares with as little as £5 a day. In fact, I could start with even less. But £5 a day equates to £1,825 over a year. If I receive the average dividend yield of 3.7%, that totals £68 a year in passive income.
Best shares for passive income
If that doesn’t seem like much, there are two points to note. Firstly, I can always add to my investment over time. Bit by bit I’d be able to grow my dividends as well as my total pot. Secondly, with some homework, I reckon I could pick some quality dividend shares that pay much more than the average.
For instance, I currently like the electricity provider SSE. It currently pays a dividend yield of 5%, and I see it as a reasonably stable play in uncertain times. Another dividend share I like right now is housebuilder Persimmon. With a dividend yield of 10%, it’s far above average. That said, it’s important to bear in mind that payments need to be sustainable. And if there is a risk to earnings, there could be a risk to the level of dividend payout too.
If I invested £5 a day into these two FTSE 100 shares, I’d end up with around £137 of passive income.
Reinvesting dividends
Now, I could withdraw this income and spend it on something nice. But right now I’d prefer to maximise my passive income in a few years rather than immediately. That’s why the next part of my plan involves reinvesting the dividends. This means that I would take my £137 of income and buy more shares. Those shares would pay more dividends, with which I could buy more shares, and so on. Reinvesting dividends is a great way to boost passive income over time and it can even be automated via an online broker.