A bit of extra income can often come in handy for most of us. Some people experiment with passive income ideas like dropshipping or running a side business. But I think a simple way to try and earn extra cash is investing in dividend shares. In fact, that is what I do.
Here are three reasons I think this approach makes sense for me.
1. Passive income should be passive!
A lot of people talk about earning passive income by setting up and running a side business.
The problem I see with that is that running a business is rarely, if ever, truly passive. True, it is possible to set up some systems to save time and automate processes. But running a business is usually fairly hands on. Even if one does not design it that way, the challenge of an idea meeting the real world can mean that it is.
By contrast, I think owning dividend shares really is passive. I spend time deciding what to buy and I may then occasionally check to make sure that nothing is happening that might change my investment thesis. But apart from that, I just sit back and collect any dividends for as long as they are paid and I own the shares. I could buy a share today and still be earning extra income from it decades from now without a jot of work on my part.
2. Owning a slice of great businesses
That is not guaranteed to happen, though. A business could always cut or cancel its dividends.
One way I try to reduce that risk is by investing in what I think are great companies, trading at attractive prices. An example of such a company in my Stocks and Shares ISA is Unilever. Its brands like Marmite and Dove are well-known and give the business pricing power. That can help it offset the challenge to profits posed by inflation. As the consumer goods company focusses on everyday uses like hair washing and sink cleaning, I expect demand to stay strong in the long term.
If you watch Dragons’ Den, you will know there is no shortage of people trying to set up their own side hustles selling shampoos, soaps, environmentally friendly washing up liquid and other such items. But Unilever already knows what it is doing in such areas and has vast resources and experience on its side. Rather than trying to start from scratch, I think it is easier for me simply to buy a tiny slice of a proven operator.
3. Extra income with limited capital
Another reason I like buying dividend shares as a way to try and make extra income is that it does not impose high initial costs on me. I could do it with £10,000, £1,000 or a few hundred pounds.
That compares favourably to many passive income ideas I have heard about, which require a lot of money upfront to help create future earnings. Dividend shares can suit my financial situation, even if I have very little money to spare. I do not need to save up huge sums to put this extra income idea into operation today!
