One of my goals is to earn passive income for life. There are multiple ways to do so, but one of my favourite methods is by owning dividend shares.
Many other sources of income involve more of my time. But what I like about shares is that once I’ve made my decisions it requires far less of my time and energy.
Passive income from dividend shares
Fundamentally, dividend shares are those that pay a regular income to shareholders. But I’d go one step further. I’d define dividend shares as those that pay an above-average dividend yield.
Right now, the average dividend yield for the FTSE 100 is 4%. But as that’s just an average, some shares pay much more. For instance, housebuilder Persimmon currently offers a whopping 13%.
That’s enough to earn £1,300 in dividends from a £10,000 investment. That sounds mighty high, so what’s the catch? From my experience, high dividends like this aren’t always sustainable or guaranteed.
There are two potential outcomes. The company could reduce the payment if it thinks it can’t afford it. Or its share price could rise, thereby reducing the yield.
Given Persimmon could halve its dividend and would still be paying more than the average, I’d still buy this share for passive income.
Top of the picks
Similarly, there are several other shares that I would consider to earn regular income. My research indicates that Rio Tinto, Phoenix Group, Imperial Brands and Legal & General could all make suitable passive income options.
On average, this selection pays 9% in dividends every year. They also have a multi-year track record that gives me confidence in their dividend policy.
Simply put, shares that have consistently been paying dividends for many decades might be more reliable than those that have just started recently.
Each of these shares are from different sectors, too. That spreads my risk and avoids putting all my eggs in one basket.
Starting small
Unlike some other forms of passive income like buy-to-let property investing, I can start small. For instance, just £15 a week equates to £780 a year. That’s enough to earn £70 in regular income. It might not sound like much, but it’s just a start.
I’m not looking to access the flow of cash right now, so I’d target a passive income at some point in the future. It’s amazing how large the sums can become over many years.
For instance, I’d consistently invest £15 a week for 20 years, and I’d reinvest all of my dividends by buying more shares. By doing so, I calculate I could receive income of over £3,500 every year without lifting a finger.
That’s all from just £15 a week. And as it’s just a start, I can raise the amount at any time.
Bear in mind that if I’m selecting individual shares, I’d want to ensure their investment cases stay intact over time. That means it will need some of my time. But certainly not as much as a property!