I can make passive income in a number of ways. But my favourite method is by owning a diversified portfolio of dividend shares.
There are several alternatives such as buy-to-let property investing, or even by putting my money in a bank account. But each have their drawbacks.
Ways to earn passive income
Money in a savings account is unlikely to achieve a great yield. Yes, it involves far less risk, but by taking on a little more risk, I think I can earn a much greater passive income.
I could buy a property to let out. With that, I’d be able to earn rental income without having to spend a whole day earning it. That said, there are still tenants and maintenance that I’d need to deal with. I’d also require quite a large sum to begin with.
With dividend shares, I can start small, with as little as £10 a week, for example. Then, over time, I could add to it to build up my total pot and regular income.
Where to start?
I’d start by finding the best FTSE 100 dividend shares. Currently, this large-cap index yields 3.6%. But as that’s just an average, there are several shares that offer much more. For instance, I’ve found some that yield a whopping 11%.
With £10 a week, I could earn passive income of £57 every year. If it doesn’t sound like much right now, over time I could raise my savings and build a larger pot. One day, I might have £50,000, which could earn me £5,500 in annual dividends. Sweet.
Top dividend shares
So which shares offer an 11% dividend yield? Currently, mining giant Rio Tinto and British housebuilder Persimmon have 11% yields.
That said, I’m often wary of very high dividends. Dividends can always be reduced or suspended. This is even more likely if the company is uncertain about its future earnings.
In this case, I think both Rio and Persimmon are high-quality businesses with reliable earnings and significant cashflows.
Fears of a recession have created many opportunities in cheap UK shares, in my opinion. And it has led to some attractive dividend yields. I’d take advantage of current prices and dividend yields to bag this chunky passive income right now.
More chunky passive income
What else could I buy? I’d consider Imperial Brands and British American Tobacco. These consumer giants offer 8% and 6% yields, respectively. Although not the highest yields available, I think the companies offer consistency and reliability.
Having paid consecutive dividends for over 24 years, they both offer reliable passive income. They also have defensive characteristics, which should make them relatively recession-proof.
That said, they don’t have as much growth potential, in my opinion. As we move out of a recession, they could underperform both Rio and Persimmon. But I’d still want to own them. That’s because I want to have a balanced portfolio of dividend shares. By doing so, I’d aim to create a reliable and steady passive income for life.