Owning shares that regularly pay dividends can be a good way to earn some extra income without needing to work for it. If I wanted to try and generate £1,000 in annual income from dividend shares by investing less than £13,000 today, here is how I could go about it.
Blue-chip focus
Some investors try to find high-yield dividend shares in an attempt to increase the amount they receive in dividends.
I am happy owning high-yield shares, but subject to the caveat that yield alone is never a reason for me to choose any particular dividend shares. I try to find great businesses selling at attractive prices. If they also have high dividend yields, all the better for my passive income streams!
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Four FTSE 100 shares I’d buy
Right now I reckon a number of blue-chip FTSE 100 shares offer me exposure to strong businesses at an attractive price – with big dividends to boot.
One is British American Tobacco. The price has drifted down lately, meaning that the Lucky Strike owner now yields 7.9%. Declining cigarette sales is a threat to revenues and profits, but the company remains a cash generation machine and is growing its non-cigarette business fast.
In the financial services sector, I would happily use spare cash right now to buy Legal & General. The insurer and pensions specialist has a strong brand and large customer base. Its shares yield 8.1%. I would also top up my holding of M&G. The asset manager has millions of customers and a well-established reputation. Its shares yield 10.2%.
Both firms could see profitability hurt if clients withdraw funds due to underwhelming performance amid shaky markets.
I also like the look of 5.1%-yielding papermaker DS Smith. It has a strong position in a business I expect to see strong long-term demand, though cost inflation could hurt profits.
All of these businesses face risks, of course. Dividends are never guaranteed. But each has a strong position in an industry with large customer demand. If they can use their unique advantages to tap that demand and generate free cash flows, hopefully the firms can keep funding sizeable shareholder payouts.
Earning money from dividend shares
Investing the same amount of money in those four dividend shares would give me an average yield of 7.8%. So if I invested £12,850, I ought to hit my income target.
If I had a spare £12,850 to invest right now and wanted to boost my passive income, I would be happy to buy those four companies for my Stocks and Shares ISA. I could then sit back and largely forget about them for years to come, as the dividends hopefully began to pile up.
I would occasionally check to see whether anything had happened to change my underlying investment logic. But, if not, I would simply let the fact of owning FTSE 100 dividend shares work its magic – and hopefully earn me a four-figure passive income year after year.
