Wouldn’t it be great to get out of bed every morning and earn passive income without having to step into an office or other workplace? I certainly think so.
I already earn passive income every day, and thankfully it’s not just a dream. I get it via the dividends of UK shares.
Some of the companies that I invest in pay a part of their profits to shareholders, in the form of dividends. Bear in mind that not all companies offer them. That’s because some decide to reinvest profits to grow their business instead.
But for passive income, I’d focus on shares that offer high and reliable dividends.
Passive income from shares
So how would I invest £1,000 today? I’d buy five dividend shares worth £200 each and add them to my Stocks and Shares ISA.
To find these, I’d start by filtering the thousands of stocks available to buy on the London Stock Exchange. The FTSE 100 as a whole currently has a dividend yield of around 4%. But as that’s just an average, I’d look to earn a bit more.
Some shares offer astonishing yields of 20% or more. These sound appealing, but I’d avoid them. The largest dividends aren’t necessarily the most reliable. It’s quite likely that many will face cuts if companies find them unaffordable.
Top criteria
If I find 4% too low and 20% too high, is there a happy middle ground? Yes, I’d consider shares that are currently yielding 6%-10%.
Even in this range, there’s still a chance my companies decide to cut or suspend their dividends. That’s why I’d want to do a bit more homework to find those with sufficient earnings and a stable dividend history.
To check if a dividend is affordable, I’d look at a company’s dividend cover. This is a simple measure of how many times its earnings can cover the payout. Specifically, I’d look for cover greater than one.
I also reckon shares that have been paying dividends for over a decade are more reliable than those that have just started. Some companies operate long-standing dividend policies, making them a dependable income source.
Top dividend shares
Considering my criteria, right now I’d buy these five shares: Taylor Wimpey, Phoenix Group, Imperial Brands, Legal & General, and Rio Tinto.
On average, they offer a 9% yield, dividend cover of 1.8 times, and 18 years of dividend history.
By splitting my £1,000 across these five shares, I’d expect to earn a passive income of £90 every year. It might not sound like much right now, but I’d hope to add new funds to my investments over time.
In addition, I could give my passive income a boost if I reinvest the dividends to buy more shares. These new shares would provide new dividends, and the cycle would continue. Dividend reinvestment is a powerful concept that can amplify gains over time.
Bear in mind that a company’s prospects could change one day. That’s why I’d need to keep an eye on my shares. So if one deteriorates, I could sell it and add in a more suitable candidate.