Passive income is just the sort of thing I like – money coming in without me working for it. One of my favourite passive income streams is investing in UK dividend shares. I can sit back and earn money from the success of leading companies with tens of thousands of skilled employees.
Here’s how I would target average weekly passive income of £100 by investing in UK dividend shares.
The significance of yield
When discussing UK dividend shares,’yield’ is a word that comes up a lot. It’s the annual percentage payout a company makes relative to its current share price. For example, currently shares in electricity network operator National Grid trade at around £9.43. Its dividends last year totalled 49.2p a share. So its yield is 5.2%.
Note that this is also sometimes referred to as historic yield. The forecast payouts for this year are the prospective yield, “future yield” or projected yield. In recent years, National Grid has grown its dividend by 1%-4% annually, so the prospective yield is actually slightly higher than 5.2%. But dividends are never guaranteed, so projected yield is just that – a projection.
A key thing to note about the yield calculation is that my yield changes based on the purchase price of the shares. So, while M&G currently offers a 9% yield, if I’d bought the shares at their low point last year and held them, my yield would currently be 17%. So, for every £100 I put in, I would be receiving £17 a year in passive income. That’s why, when picking passive income streams among UK dividend shares, I don’t just try to buy companies with strong dividend potential. I also focus on buying them when their share prices make their yields attractive.
Starting with the end in sight
For a target of £100 a week in passive income, I’d need my UK dividend shares to generate £5,200 annually. With a yield close to 5%, like National Grid, that would mean I’d need to invest £104,000 to meet my target.
But even the best companies can run into difficulties. So I wouldn’t simply put my money in one company. I’d diversify across different companies and business sectors.
I have to remember that the higher the average yield, the less capital I would need to meet my £100 weekly target.
That might tempt me to buy riskier shares with very high yields – something commonly referred to as a value trap. It’s important for me to avoid that temptation. Instead, I would focus on shares with an attractive yield and that I felt had strong dividend prospects for coming years. To assess that, I would look at the firms’ free cash flow and debt levels. Along with the sustainability of their competitive advantages, that would help me understand how likely they are to be able to pay out dividends in the future at a certain level.
Weekly passive income
It’s possible to get dividends every week, but it takes a lot of planning. Some shares only pay out once a year. So picking shares that offered me a weekly payout would mean a lot of research and holding a large number of different companies.
So, even if targeting £100 a week in passive income, in reality I’d expect the passive income to come in unevenly. I’d use the weekly target as a guide to my annual goal.
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Christopher Ruane has no position in any shares mentioned. The Motley Fool UK has recommended National Grid. 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.