The prospect of earning additional income without working more hours in the day appeals to me. One of the ways I try to do that is by owning income shares.
I think building a stock portfolio that pays me regular dividends could even give my monthly income a four figure boost. Right now could be a great time for me to start. Here is why.
Seizing the moment
Inflation is high and the economy is in trouble. That has made some investors less keen on income shares than they were before. What is the point of earning 3% of their investment cost back in dividends each year if inflation is triple that level, they wonder?
One effect of that way of thinking — and broader market worries — is that some share prices are down. That has pushed up their dividend yields. For example, shares in Sainsbury’s have fallen 23% in the past year. That means the dividend yield is now 6%.
But here is the thing. I do not expect inflation to stay high forever. But if I buy 6%-yielding income shares today, as long as the company does not cut its dividends, I could still be earning 6% of my investment years from now, when inflation has returned to far lower levels.
Building a portfolio of income shares
The risk of a dividend cut always exists though. After all, high inflation might also hurt company profits, leading a firm to pay out less money to shareholders.
To try and reduce the risk that poses to my dividend income, I do two things. One is to diversify my investments across a range of shares. The second is to focus on finding great businesses with attractive yields, not great yields from unattractive businesses.
Hunting for shares to buy now
Many shares have gone down in price lately – but they could still fall further.
However, rather than trying to time the market, I am seizing the opportunity now to hunt for income shares. If the potential return is already attractive to me, the fact that it might become even juicier if I wait a few months or years to buy seems irrelevant. A share price could suddenly shoot up again and I may have missed the opportunity altogether by being too greedy.
So I am taking advantage of recent market volatility to try and find income shares I can purchase. I am looking for companies with a competitive advantage I reckon can help them make large profits in markets with long-term customer demand. After all, profits fund dividends.
Aiming for a monthly £1,000 from income shares
Although dividend yields are not the focus of my hunt, they do help determine how much I need to invest to try and hit my monthly target of receiving £1,000 in dividends.
At an average yield of 5%, for example, I would need to invest £240,000. If the average yield was higher, I could invest less. But I would always hunt for shares based on the attractiveness of a business’s outlook, not just yield.
If I did not have that money, I could still use the current opportunity to boost my earnings by buying income shares. I would simply build up to the monthly target more slowly.
