Wouldn’t it be great to have multiple sources of income that don’t involve much time or effort? That’s passive income. And one of my favourite ways to achieve it is with dividend shares.
What are dividend shares?
I find the best way to think about dividend shares is to compare them with renting out a property. If I buy a house to rent out, I’d expect to earn regular rental income. And over time, the value of my property might rise.
In the same way, by investing in shares, I can earn regular dividend income. And over time, I’d hope the value of my shares would rise too.
The difference with shares is that I wouldn’t need to deal with leaky taps or unpaid rent. And by investing in a Stocks and Shares ISA, I’d probably pay a lot less tax.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Bear in mind that the value of my shares can rise and fall when looking at days or weeks. But over a longer timeframe, the trend tends to be up.
Passive income plan
So how should I get started? And how much can I start with?
I reckon I could earn passive income from shares with as little as £20 a week. That’s £1,040 over a year.
With this I could buy shares in the FTSE 100. That’s made up of the largest 100 listed companies in the UK. Currently, I’d receive a 3.9% dividend yield.
By my calculations, that results in a passive income of £40 a year. It might not sound like a lot right now, but it’s a start.
There are a couple of strategies I could use to boost this income. For instance, over time I could save some extra money and buy more shares. More shares equate to more dividends. Alternatively, with a bit of research I could find some shares that pay out even more income.
Boosting dividend income
Let’s look into that a bit further. Within the FTSE 100, there are currently five shares that offer over 8% in dividends. They’re Rio Tinto, Persimmon, Antofagasta, M&G and Imperial Brands. By spreading my money across all of these, I could receive a passive income of £83.
But when picking individual shares, there are some factors I’d consider first. I’d look at how many years the company has been paying dividends for. Some companies, like Imperial Brands, have reliably been paying shareholders for 25 years. Although there’s no guarantee that it will continue, it gives me an element of comfort.
Dividends are typically paid from current earnings, so I’d only invest in shares that I think will continue to thrive over the coming years. Companies can decide to reduce or suspend them if they become uncertain of their earnings. This was a frequent but temporary occurrence during the Covid crash in March 2020.
Lastly, I’d also try to diversify and spread my selection across a few different sectors and industries. That way, I’d spread my risk and not have all of my eggs in one basket.
By considering these factors, I should be able to find several quality shares that could pay me a chunky passive income for life.