Different people try to top up their income in a variety of ways, from taking on a part-time job to buying a property they can rent out. My own approach of buying dividend shares requires neither the money upfront for a rental property nor the time commitment of a second job.
If I was starting even with no money today, here is how I would target weekly income of £100 from using such an approach.
Putting aside money regularly to invest
In order to buy the dividend shares I would need money. I could invest a lump sum – but what if I did not have any money to start? In that case, I would get into the habit of saving regularly. I would target a consistent amount that felt achievable, given my own financial situation.
If I saved what I could afford over time, I would not hit my monthly target income at first. Instead, I would build up to it over the course of years. But as I saved and invested in dividend shares, I ought to start earning some income, even if it was below my target.
Finding dividend shares to buy
With the money accumulated I would start to buy a diversified range of dividend shares. Even the best businesses can run into unexpected difficulties, so spreading my investments over a variety of companies would hopefully limit the impact on my income if one of them stumbled.
Dividends are basically a way for a company to pay excess cash to shareholders after it has taken care of expenses like capital expenditure and servicing its debt. So I would be hunting for companies that I thought could generate enough surplus cash to fund such shareholder payouts.
What would I look for? First would be a business area where I expected strong customer demand. But such a field often attracts lots of companies, which can push down profit margins. So I would zoom in on firms with some sort of competitive advantage, for example the unique distribution network of National Grid or the strong brand of Nike.
I would then have a look at a company’s balance sheet to see whether it had a lot of debt that might hold it back from paying dividends in future.
Aiming for my weekly income target
I would also consider whether a share’s price offered me good value as well as what its dividend yield is. That is the amount I would hope to earn each year in dividends as a percentage of the price I pay for the shares.
To target £100 a week, I would need to earn £5,200 each year from my dividend shares. If I invested in shares with an average yield of 5%, that would require me to spend £104,000 to hit my target.
A higher average yield could let me reach my target while investing less money. But I do not invest only based on yield. As dividends are never guaranteed, my primary focus is always finding quality businesses I think can produce surplus profits years into the future.
The post How I’d target £100 a week in income from dividend shares appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Nike. 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.