One of my favourite passive income ideas is owning dividend shares. That is because I can benefit from the hard work and success of some massive companies without having to lift a finger myself.
Here is a handful of dividend shares I would buy today if I had spare cash and wanted to build a passive income portfolio.
Household names
I would invest in three blue-chip shares that are leading companies in their field but operate in different sectors.
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Sainsbury’s has a large chain of supermarkets but also benefits from a growing digital footprint. A big user base and a set of distinctive retail propositions give the firm a competitive advantage that can help it make profits. Such earnings support dividends and currently Sainsbury’s shares yield 5.1%. However, cost inflation remains a risk to short- and medium-term profitability.
I would also invest in financial services giant Legal & General, with its 7.1% yield. Like Sainsbury’s, it has a very well-established and familiar brand. Claims inflation is a risk to insurers. Rival Direct Line recently axed its dividend. But I would be happy tucking Legal & General into my portfolio for the long term.
My third pick would be to add to my existing holding of Lucky Strike cigarette manufacturer British American Tobacco. While declining sales are a threat to revenues and profits, the company has actually been growing the former through a combination of acquisitions, price rises and expanding its non-cigarette business. Like Legal & General, it offers a juicy 7.1% yield.
Diversification
One of the challenges of investing is how best to diversify. Diversifying helps me reduce my risks, by ensuring my portfolio is not too exposed to any one share.
In this example I am using a portfolio of five dividend shares. That already offers me some diversification. Two of them are forms of investment trust to give me additional diversification, as those trusts each invest in dozens of shares.
Investment trusts
The first is the European Assets Trust. Even after a recent dividend cut, its prospective annual yield is a tasty 6.2%.
The dividend cut reflects a policy of basing it on the trust’s net asset value per share at the end of the prior year. So the dividend could rise again in future, although it may fall too.
The trust invests in a range of small- and medium-sized companies in continental Europe. That could help it benefit when the European economy moves back into growth mode.
I would also invest in the Income & Growth venture capital trust. The yield here is an impressive 10.7%, for now. As dividends are funded from the trust’s investments in developing companies, they can move around substantially.
There is a risk the trust invests in promising companies that end up going nowhere, hurting profits. On the plus side, some of its choices could end up doing very indeed – with Income & Growth benefitting from having got in at an early stage.
Monthly target
The average yield of the above five dividend shares is 7.2%. So to hit my target of £120 in monthly passive income, I would need to invest £28,800. I could do that using a lump sum. But I could also work towards my target over time, by investing some money on a regular basis.
