Passive income can be made in a number of ways. I could buy a house to let out, but that involves a significant sum to start with and I’d have to deal with leaky taps.
I could save money in a bank account, but interest rates are still relatively low.
That leads me to my preferred option, dividend shares. Buying shares in companies would be my strategy to earn passive income for life. Let’s take a look further.
Passive income from dividend shares
Dividend shares are those that tend to pay above-average dividend yields. Currently, the FTSE 100 offers an average yield of 4%. That’s not too bad, but there are many shares that offer much more. For instance, almost a dozen Footsie shares yield over 7%.
High-dividend stocks aren’t restricted to this stock index either. If I widen my search to smaller companies, my universe of potential options expands much further.
In addition to the chunky dividends on offer, over time the value of my shares could grow too. That could push my total annual return to over 10%.
Points to consider
I have to bear in mind that dividends aren’t guaranteed. Companies might decide to cut or suspend payments if the business outlook declines or if earnings drop.
And the value of shares can fall in the short term too. 2022 has so far been a year in which many share prices have tumbled over fears of slowing growth.
That said, many companies have a tremendous track record for paying dividends. Some have paid out consistently through booms and busts over many decades. That’s exactly the kind of reliability that I look for.
Also, investing in shares is best done over the long term. During shorter periods, share prices can rise and fall, but they tend to trend upwards over time.
Some numbers
How far could just £10 a week take me? Every year I’d be investing £520. That’s enough to earn a passive income of £52 if I can achieve a 10% annual return.
It might not sound like much now, but I’d aim to consistently invest for many years.
If I manage to do so over 30 years, I could build a pot worth over £85,000. That’s enough to earn passive income of £8,500 a year at that 10% figure. Not bad for just £10 a week, although I have to accept that I may not achieve my 10% goal and the rewards could be much smaller. I could even lose money.
Best shares for passive income
How would I start? I’d look for shares that offer at least 7% dividend yields. I’d also look for a track record of 10 years of consecutive payments.
Next, I’d select shares from a variety of sectors. That’s to diversify and avoid putting all of my eggs in one basket. Lastly, I’d prefer strong brands that can withstand the test of time.
From the FTSE 100, that leads me to Rio Tinto, Phoenix Group, Imperial Brands, Taylor Wimpey, and Legal & General.
Looking at smaller companies, from the FTSE 250, I’d pick Synthomer, Direct Line Insurance, and Liontrust Asset Management.
Of course, my top picks can change over time. I’d need to monitor how the businesses are performing. But they sure beat leaky taps.
