Some more money would be helpful for many people. But generating extra income often involves working longer hours. That may not always be possible – or desirable. That is why I try to earn extra income without adding hours onto my working schedule. I do this by investing in dividend shares.
Buying dividend shares does not have to be complicated and I could start doing it without any prior savings. Here is how.
Putting money aside to invest
Imagine I decided to target a weekly contribution to my investment fund. Doing so would give me some discipline and hopefully make me more likely to develop a consistent saving and investment habit.
To start with, £20 a week would be a good amount, in my opinion. It is small enough to be manageable. But it is also big enough that, over time, it will add up. It would give me over £1,000 per year to invest in dividend shares.
Finding dividend shares to buy
But how would I know what dividend shares might make sense for my plan to generate extra income. Basically, that income will come in the form of dividends.
So I will be looking for companies that I think are likely to pay dividends in future, regardless of whether or not they have done so in the past. That wll require profits, as a dividend is essentially how a company distributes its excess earnings among shareholders.
So I would focus on industries I understood and those likely to see ongoing strong customer demand. I would look for businesses in areas with some sort of competitive edge that could help set them apart from rivals.
For example, they may have a distribution network like National Grid or a proprietary formula like Coca-Cola. That matters because such a competitive advantage can help firms to charge prices that support a decent profit margin.
I would also look at what demands there may be on a company’s future earnings, apart from paying dividends. For example, a firm may have a lot of debt, or needs to make big capital expenditure investments.
Putting my extra income idea into action
Having made a shortlist of such businesses, I would want to dip my toe in the water and buy some dividend shares. Even the best investors can miss important details, or have an investment thesis turned upside down by an unforeseeable turn of events. So I would split the money across a diverse range of shares.
The amount of extra income I would hope to receive depends on the average dividend yield of the shares I buy. Dividend yield is partly based on the price at which I buy shares – as the price goes down, if the dividend is constant then the yield gets higher.
Higher yield shares could mean more income for me, but I would still only buy shares that match the description above. But by having the patience to buy them when their price is lower, I might be able to boost my passive income.
Investing £1,000 in dividend shares yielding an average of 5% should mean I earn £50 of extra income in a year. From that, by continuing to save weekly and invest, I could hopefully increase my income streams over the years.