The Amazon share price tumbled by 10% on Friday, recovering somewhat from a whopping 20% drop overnight. This came after the company released its latest earnings report. The retail giant lost $200bn in value after it missed revenue estimates and issued a disappointing guidance for the next quarter.

It’s not often a trillion dollar company experiences such a sharp share price move. Does it present an opportunity for me to buy one of the world’s largest companies at a discount? Or has this FAANG stock lost its sparkle?

Amazon share price drop

To answer that, I’d need to look a little closer at what the company said. I suspect the Amazon share price dropped so sharply due to the guidance given for the upcoming holiday season.

Amazon said it expects net sales to be between $140bn and $148bn in the fourth quarter. But analysts were expecting the forecast to be over $155bn.

CEO Andy Jassy pointed to the macroeconomic environment. Higher inflation and soaring interest rates are squeezing customer finances. And that is directly impacting Amazon’s sales. The stronger dollar this year is also having a negative impact on its sales.

Looking ahead

That said, the stock market tries to look forward and anticipate what sales and profits are likely to be in the months and years ahead. So could the situation improve and help the Amazon share price to bounce back higher in the coming year?

Much seems to be outside of Amazon’s control. Any sign of resolve in the conflict in Ukraine could result in lower energy costs. Any signs of falling inflation could persuade the US Federal Reserve to pivot on their current approach of raising interest rates.

All these factors could improve the macroeconomic environment and lead to higher sales for Amazon.

I reckon all these things will happen eventually and the situation will improve. But it might take some time. That’s why I’m in no hurry to buy Amazon shares right now.

Long-term investing

That said, I favour long-term investing. Looking several years ahead, the current challenges may look like temporary blips in Amazon’s long-term journey.

Despite the external economic factors currently hurting the company, there are levers that it can pull. It’s already taking measures to tighten its belt and reduce costs. That includes pausing hiring in certain businesses and winding down some of its less-used services.

At the same time, it will continue to focus on providing the best customer experience. This has been key factor in Amazon’s ethos since Jeff Bezos started it as an online bookstore a few decades ago. By putting customers first, it believes the Amazon share price will reward shareholders in the long term.

That’s where I agree. In addition to being the world’s largest online retailer, Amazon also owns the world’s largest cloud platform, Amazon Web Services (AWS). I reckon it’s well-placed to benefit from a continuing global shift towards cloud computing over the coming decade.

Overall, I think the long-term future for Amazon looks bright. That said, near-term headwinds could lead to a volatile share price over the coming months. It’s certainly an investment I’ll be keeping an eye on.

More reading

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harshil Patel has positions in Amazon. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

There are multiple ways to earn passive income but my favourite method is owning dividend shares.

Dividends are paid to shareholders in return for investment in a company. They’re effectively a share of the profits.

But with hundreds of FTSE stocks available to buy, how can I sift through and find the best options for an income top-up.

Crunching the numbers

First, I’d start with a target. Let’s say I want to earn £100 every month in passive income. That’s £1,200 a year. To achieve this goal, I need to calculate how much I’d need to invest.

The answer depends on the dividend yield of the shares that I buy. Right now, the average FTSE 100 yield is just over 4%. According to my calculations, that means I’d need to invest £30,000 to reach my goal.

But I reckon I could earn £100 in monthly dividends by investing just half of this sum. I’d aim to do this by finding shares that yield over 8%.

Looking the FTSE All-share index, I note that 41 shares offer dividend yields of 8% or more. But I’d want to narrow down my list to five top stocks.

My criteria

A company’s dividend yield isn’t the only factor to look at. A high yield is no use to me if it’s not sustainable, or reliable.

I want my dividends to be affordable for the company to continue paying out. That’s why I prefer dividend cover of greater than 1.2 times.

Dividend cover measures how much a dividend is covered by a firm’s current earnings. A figure of less than one indicates that it doesn’t earn enough to cover its anticipated payout.

Granted, it could still pay from its cash reserves, but I prefer companies that don’t need to dig into their savings.

For reliable passive income, I’d want to pick stocks that also have a consistent and long dividend history. And looking to the future, I’d want confidence that earnings will be sustainable.

Top passive income stocks

So which stocks meet my criteria? If I had some spare cash right now, I’d buy Rio Tinto, Taylor Wimpey, Phoenix Group, Legal & General, and Imperial Brands.

This group offers a 9% dividend yield. In addition, it has average dividend cover of 1.8, which implies that earnings comfortably exceed dividends.

Lastly, this selection has an average 18-year history of consistently paying out cash to shareholders.

Bear in mind that global miner Rio Tinto and UK housebuilder Taylor Wimpey are both cyclical businesses. Earnings could fall in a recession. That could result in a dividend cut, reducing my dividend income.

However, my selection diversifies by owning shares across several sectors. Instead of putting all my eggs in one basket, I’d be spreading my risk across each share equally.

Also, share prices can swing up and down. But as I’d own quality companies that I expect to thrive over many years, I can effectively ignore day-to-day share price volatility. Instead, I would hope to enjoy a steady stream of passive income.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The FTSE 100 is home to many high-quality dividend shares. That’s where I’d look if I was targeting a second income.

Companies that offer dividends to shareholders are essentially sharing a portion of their profits in return for my investment.

The amount that each company distributes varies. To aid growth, some businesses choose to reinvest profits instead. But many FTSE 100 companies opt to pay a dividend.

I calculate that almost 90% of FTSE 100 shares are currently paying a dividend. And the average dividend yield is 4.2% right now.

That means if I invest £5,000 in the FTSE 100 index, I should receive around £210 a year in passive income.

But I reckon I could earn a lot more by carefully picking and choosing a smaller selection of shares.

Stable shares

For instance, several Footsie shares currently offer more than 6% a year. Although the dividend yield is an important factor, I’d also look for several characteristics for the best shares.

For a reliable second income, I’d want to own shares that have consistent earnings. That should result in a steady stream of dividends as they tend to be paid from current earnings.

To find this characteristic, I’d look for stable and mature businesses. I’d also look at a company’s dividend history. A business that has distributed dividends for several decades gives me some confidence that it could continue to do so.

Bear in mind that things can change, so I’d still need to monitor my preferred shares. New competitors or technologies could affect a company’s outlook.

Affordable dividends

Next, I’d want to own shares that can comfortably afford their dividends. To find these, I’d look for businesses that are unlikely to see a sharp downturn in earnings any time soon.

Right now, with the UK heading towards a recession, I’d avoid cyclical shares. Instead, I’d focus on owning more consumer staples and utility companies.

In addition, I prefer shares that have dividend cover greater than 1.2. Dividend cover shows how well a company’s payout is covered by its earnings. A figure below one would indicate that its current earnings might not be enough to pay for its dividend.

Five top stocks

If I had an extra £5,000 to put towards building a second income, I’d split it equally between five selected FTSE 100 shares. Some of those that meet my criteria right now include Imperial Brands, Unilever, Vodafone, National Grid and SSE.

With this group, I’d be getting a 6% yield, dividend cover of 1.6, and an average history of 29 years.

That’s enough to earn £300 a year in passive income. It might not sound like a lot right now, but over time I could add to my pot and continue to buy more of these dividend shares.

If I’m able to invest £5,000 every year for the next decade, I’d build a pot worth around £66,000. That’s enough to earn almost £4,000 a year in dividends thereafter.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands, Unilever, and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Plenty of shares have tumbled this year. Soaring inflation has prompted many of the world’s central banks to end an era of ultra-low interest rates. These higher borrowing costs could tip the UK into an uncomfortable recession.

As we enter this potentially trickier economic phase, I’m looking at the best passive income shares for my Stocks and Shares ISA.

20% dividend yield?

Currently, the FTSE 100 yields around 4.2%. Last year, I would have said that was pretty reasonable. But with interest rates climbing and expected to rise further, I would prefer a much larger dividend yield right now.

Thankfully, the Footsie isn’t short of high-yielding shares. The largest dividend can be had from housebuilder Persimmon (LSE:PSN). It currently offers a dividend yield of a whopping 20%. That’s enough to make £1,000 a year in passive income from my £5,000 investment.

That said, I’d be cautious about this. I reckon it’ll be difficult to sustain such a yield, and there’s a chance it could be cut significantly. That can often happen when there’s a change in a company’s earnings.

With mortgages becoming increasingly expensive, property prices could fall over the coming year. That could affect housebuilders’ earnings, which in turn could lead to dividend cuts.

Reliable passive income

So where can I find reliable dividends? I’d look to non-cyclical businesses that could continue to perform well in an economic downturn.

For instance, Imperial Brands (LSE:IMB) sells established products that are less affected by rising prices. It currently offers a 7% dividend yield that’s well-covered by its earnings.

In addition, it has a considerable track record of distributing income to shareholders, and it has been paying dividends for at least 25 years.

Its share price has risen by a remarkable 39% over the past year, but I think that’s partly due to its stable properties in times of crisis. But with a price-to-earnings ratio of just 7x, I’d still consider it to be cheap.

Bear in mind that when the economy picks up again, this stock could underperform other faster-growing options. That said, I’d still buy this share for its defensive properties.

Wind in its sails

Another reliable passive income share I’d buy is SSE (LSE:SSE). This renewable energy provider currently offers a 6% dividend yield. Like Imperial, SSE also has a multi-decade track record of paying dividends to shareholders.

Although future payments aren’t guaranteed, it gives me some comfort in its management’s dividend policy.

When looking for the best passive income, I’d say it’s important to find affordable dividends. One metric that I look at is a share’s dividend cover. This measures how much a companies’ dividend is covered by its earnings.

SSE has dividend cover of 1.4 times. As it’s comfortably above one, I’m confident that it’ll be able to afford its payments.

What I like about SSE is that it has a fully-funded investment plan over several years, and reasonably clear visibility of its earnings. It also aligns with long-term UK climate and energy security goals.

There’s always a risk that windfall taxes are applied by Governments, which could impact earnings slightly.

Overall, if I had £5,000 to invest right now I’d split it across both of these shares to aim for lifelong passive income.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Recession risks are rising, borrowing costs are soaring and investors are nervous amid market turmoil. So why should I invest in a Stocks and Shares ISA right now?

Times of crisis can often create opportunities. Share prices can fall in the short term due to temporary factors. But as a long-term investor, I can somewhat ignore near-term price swings.

Timing the market and trying to buy at the bottom is notoriously difficult. One of the golden rules of long-term investing is said to be, “time in the market beats timing the market”.

It suggests that investing consistently for many years should give a better return than selling in times of crisis with the hoping of buying back later.

If I had the spare cash and wanted to start investing in a Stocks and Shares ISA today, here’s what I’d do.

Aiming for a £1m Stocks and Shares ISA

First, I’d invest consistently and regularly. That way, even if share prices fall in the near term, I can rest assured that my automated plan is picking up cheap shares.

History shows that over long periods, average stock market returns have been around 8%-10% a year. Although future returns aren’t guaranteed, I’d use this figure as an estimate.

I’d like to aim for a £1m Stocks and Shares ISA. But to do so, I’d need to invest for many years. I calculate that if I invest £350 every month for 35 years, I could have a pot worth around £1.1m.

What to invest in?

I could invest in a FTSE 100 or S&P500 index fund. They would track the largest UK and US stocks.

Alternatively, I could pick and choose my own shares. Many have achieved a far greater than average return over the years.

With some reading and research, I’d look for shares that could perform well over the coming years and decades.

More specifically, I’d look for high-quality businesses that offer strong profit margins and a solid competitive advantage. This could be in the form of patents, customer relationships or a brand.

I’d look for a double-digit return on capital employed. That’s a key measure of a quality business, in my opinion. It demonstrates how efficiently a company uses its capital.

Next, I’d like to own a mixture of stocks that span growth, value, and income. Over time, one category might perform better than another. For instance, this year, value stocks have performed far better than growth stocks. But that won’t always be the case.

Top picks

Right now, the FTSE 100 includes several of the shares that I’d buy if I had £350 a month to add to my ISA. These include analytics business RELX, equipment rental company Ashtead, and defence leader BAE Systems.

On average, these three shares offer a return on capital employed of 16%, and a tasty 20% profit margin. Their performances over the past decade have been remarkable. If I’d bought all three shares exactly 10 years ago, I’d have achieved a return of 19% a year.

Although the result could be very different over the coming decades, if I can consistently find such gems, I could potentially achieve my £1m goal much earlier than planned.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended RELX. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It’s a great time to build a passive income plan, in my opinion. That’s because the dividend yields of several UK shares looks particularly attractive right now.

Although the FTSE 100 currently yields 4%, there are many individual shares that offer much more. At the top of the leaderboard is housebuilder Persimmon. It currently offers an astonishing 18%. That’s enough to earn £900 a year if I had £5,000 to deploy.

Stable passive income

That sounds great to me at first glance. But I’d be aware that jumbo dividend yields can be a sign of caution. It could indicate a risk of a dividend cut.

For a stable passive income, I’d prefer to pick shares that have more reliable earnings. That’s why I’d look for dividend cover that’s comfortably above one. That would indicate sufficient earnings to be able to afford to pay current dividends.

Top dividend shares

Next, I’d like to own shares that have a long history of distributing dividends to shareholders. Such a supportive policy could help me to earn steady passive income.

When I look at the FTSE 100 today, several shares stand out to me. My top 10 list comprises of: Rio Tinto, Taylor Wimpey, Phoenix Group Holdings, Legal & General, Vodafone, Imperial Brands, Aviva, Land Securities Group, British American Tobacco, and SSE.

If I had £5,000 to put toward a passive income plan, I’d do the following. I’d split my pot equally across these 10 shares. By doing so, I’d own a portfolio of shares that offer an 8% dividend yield. That’s enough to earn a tasty £400 a year.

Looking ahead

In addition, on average, this group has been distributing dividends for 24 back-to-back years. That’s exactly the type of history that gives me confidence for the future.

Bear in mind that dividends are typically paid from earnings, so I’d need to ensure my companies continue to earn enough going forward. I can check this by annually monitoring my stock picks.

One advantage of splitting my £5,000 across multiple shares rather than just buying one is diversification. I’d be spreading my risk to avoid putting all my eggs in one basket.

That way, if one of my shares experiences a shock to its business, my total portfolio is unlikely to suffer significant damage.

The power of reinvesting dividends

Once I’ve bought my shares, I have a choice of what to do with my dividend income at the end of the year. I could just spend it every year and keep my £5,000 invested. Or I could reinvest my dividends.

If I don’t need extra passive income right now, there are great advantages in delaying when I take the income. By reinvesting them every year, I could earn dividends from my dividends.

The additional return might look small to begin with, but over time it can have an extraordinary impact. It’s a bit like a snowball rolling down a hill.

I calculate that if I delay taking passive income for a decade, my annual dividends could double from £400 to more than £800. And instead of a lump sum, if I were to invest £5,000 every year for a decade, I calculate that I could earn over £5,000 in annual dividends thereafter.

More reading

Harshil Patel has positions in British American Tobacco. The Motley Fool UK has recommended British American Tobacco, Imperial Brands, Landsec, and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The recent stock market volatility may have provided me with an opportunity to buy my favourite dividend shares at a discount. But as share prices snap back, is it too late for me to buy?

With the Bank of England stepping in to restore orderly financial conditions, a deeper crisis may have been averted.

Cheap dividend shares

That could bode well for long-term savings and retirement business Phoenix Group (LSE:PHNX).

Yes, the economic environment remains uncertain. Any further disruption to financial conditions could negatively impact Phoenix in the near term.

But due to the recent drop in the share price, it offers a whopping 10% dividend yield. I don’t think this opportunity will last much longer, so I’m keen to buy it soon if funds allow.

Just two weeks ago, it was yielding ‘only’ 8%. That helped to make it one of the best dividend shares in the FTSE 100. Now, the opportunity is even better, in my opinion.

Dividend shares aren’t just about the yield, though. I prefer those that offer sustainable, affordable and reliable dividends. I reckon Phoenix Group ticks those boxes too. Its dividend cover of 1.8 times, and 13 years of consecutive payments looks impressive.

Looking ahead

Next, I’d consider housebuilder Taylor Wimpey (LSE:TW.). But why would I even think about buying shares in this sector when the outlook looks so dire?

This industry could face challenges with a potentially weaker UK housing market. Interest rates are rising, and mortgages are becoming more expensive as a result. The cost-of-living squeeze could also put additional pressure on affordability.

So far, house prices have proved resilient. But I think that could be about to change, and I’d expect a more challenging period ahead.

That said, Taylor Wimpey’s share price has already fallen by 33% over the past year. And its price-to-earnings ratio has fallen from 9 times to 5 times so far this year, which makes it remarkably cheap. It could be argued that a weaker housing market outlook is already priced into the shares.

Its chunky 10% yield looks appealing to me. If I had some spare cash, I’d buy these dividend shares today for the passive income they could provide.

Stable passive income

Lastly, I’d pull the trigger on Legal & General Group (LSE:LGEN). It offers an appealing 9% yield. This insurance business is well-established. Impressively, it has been distributing regular dividends for over 30 years. This is just the kind of reliability I like to see in the best dividend shares.

The financial services firm reported that market volatility had limited economic impact on the company. That could make recent share price falls an opportunity, in my opinion.

CEO Nigel Wilson commented, “Our businesses are resilient, and we are on track to deliver good growth in key financial metrics for 2022.”

I have to bear in mind that share price growth has been limited over the past few years. And a weaker economy could limit the significant growth seen in the past.

That said, its solid dividend yield should make up for it. With growing earnings, a sensible balance sheet and a well-covered dividend, I’d certainly buy these dividend shares if I had some extra cash.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

FTSE 100 shares remain volatile and under pressure. Part of the reason for this is a complex situation in bond markets that became a risk to the country’s financial stability.

The Bank of England stepped in to stabilise financial markets, and it looks like it has worked for now.

With falling stock prices, are there opportunities to buy Footsie shares at a discount?

I believe so, but much depends on my time horizon. As a long-term investor, I should be able to withstand short-term stock market wobbles.

Investing in the FTSE 100

Over the coming weeks and months, share prices could be driven more by factors such as interest rates, or investor sentiment. But if I plan to hold my shares for several years, I’d expect the investments to eventually become fruitful based on their fundamental attributes.

For instance, I’d look for shares that offer stable earnings growth, strong balance sheets, and sustainable competitive advantages. If my FTSE 100 picks can maintain these characteristics, I’d expect them to grow over time.

I’d also want to own big and established brands that have survived over many decades and through several market cycles.

That said, if I was investing £1,000 right now in the current market environment, I’d still want to limit my downside as much as possible. That’s why I’d focus on buying cheap but defensive businesses.

A portfolio staple

First I’d consider 100-year-old consumer goods giant Unilever (LSE:ULVR). This global business operates in over 190 countries, and its products are used by over 3.4bn people every day. It owns many established and popular brands that include Ben & Jerry’s, Domestos, and Dove.

Unilever benefits from a 15% profit margin and 15% return on capital employed. In addition, its 4% dividend yield should also provide me with regular passive income while I wait for the share price to rise.

Bear in mind that the cost-of-living crisis could lead to customers moving to cheaper competitor brands.

That said, Unilever has survived through recessions before. It’s also trading at a relatively low price-to-earnings ratio of 17x. That suggests an attractive entry point for this quality business and I’d happily buy these shares right now.

Defensive defence

Next, I’d buy aerospace and defence company BAE Systems (LSE:BA.). 2022 has seen a greater focus towards defence, and government spending in this area is set to rise.

I like that its long-term contracts provide stable cash-flow over many years. It also has a successful track record in delivering solid returns for shareholders, in my opinion. And I reckon that is likely to continue.

BAE is a world-class and technology-led business. Also, 63% of its sales are in the US and UK, where it has deep customer relationships. That said, having a concentrated customer base could become a headwind for BAE if these countries cut back of defence spending.

Overall, though, this FTSE 100 defensive defence contractor offers a double-digit profit margin, and a 3%+ dividend yield.

I’d happily split my £1,000 investment and buy both shares for my Stocks and Shares ISA.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m looking for part of my Stocks and Shares ISA to provide me with regular and reliable income. Some shares in the FTSE 350 offer whopping yields of up to 35%, but that doesn’t look particularly sustainable to me.

When a dividend yield is so high, it can often be a warning. Earnings may be set to suffer, which would likely mean a dividend cut. Or the yield could look high as a result of a tumbling share price.

Either way, I would avoid these shares. As a guide, I tend to avoid dividend yields over 15%.

The sweet spot

The Bank of England base interest rate is expected to climb towards 4% next year. To compensate me for the additional risk I’m taking by investing in shares, I’d want to earn a greater return than that.

So if I think 4% is too low and 15% is too high, what should I look for? I’d say 6%-10% is my sweet spot.

There are around 40 shares in the FTSE 350 that offer dividends in this range. But I want to narrow this list down further.

The dividend yield isn’t the only factor to consider. I’d want to own shares that are able to sustain these dividends over time too. To determine which stocks have the best chance, I’d look for a few qualities.

Quality dividends

Dividends tend to be paid from earnings. So I’d want to find companies where I think sales and profits will rise. I’d also want to ensure that earnings can sufficiently cover dividends. That’s why I’d look for a dividend cover of at least one.

Dividend stocks tend to be in a more mature phase of their growth cycle. That’s in contrast to faster-growing companies that tend to reinvest all excess cash in growing the business. I find that many of the best dividend shares are ‘large-cap’, stable and established over many years.

A strong dividend history also looks encouraging to me. I find that it often bodes well for future dividend policy too. Bear in mind that much can change in the future, and a business could suffer a fall in earnings. But I’m more comfortable in owning a company that’s focused on returning profits to shareholders in the form of dividend income.

My Stocks and Shares ISA

Now that I’ve determined some criteria, which shares should I add to my Stocks and Shares ISA next?

Right now, I’d buy Aviva, Imperial Brands, Phoenix Group Holdings, Taylor Wimpey and Moneysupermarket.com. With £5,000 to invest, I’d split my investment across all five shares equally.

With this selection, I’d be getting a 7% dividend yield. That’s impressive. On average, brokers forecast a 7% gain in earnings over the coming year too.

With a dividend cover of 1.7 times, and an average dividend history of 19 years, I reckon I’d have a good chance of receiving reliable passive income.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Moneysupermarket.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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.

More reading

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.