Different people try to top up their income in a variety of ways, from taking on a part-time job to buying a property they can rent out. My own approach of buying dividend shares requires neither the money upfront for a rental property nor the time commitment of a second job.
If I was starting even with no money today, here is how I would target weekly income of £100 from using such an approach.
Putting aside money regularly to invest
In order to buy the dividend shares I would need money. I could invest a lump sum – but what if I did not have any money to start? In that case, I would get into the habit of saving regularly. I would target a consistent amount that felt achievable, given my own financial situation.
If I saved what I could afford over time, I would not hit my monthly target income at first. Instead, I would build up to it over the course of years. But as I saved and invested in dividend shares, I ought to start earning some income, even if it was below my target.
Finding dividend shares to buy
With the money accumulated I would start to buy a diversified range of dividend shares. Even the best businesses can run into unexpected difficulties, so spreading my investments over a variety of companies would hopefully limit the impact on my income if one of them stumbled.
Dividends are basically a way for a company to pay excess cash to shareholders after it has taken care of expenses like capital expenditure and servicing its debt. So I would be hunting for companies that I thought could generate enough surplus cash to fund such shareholder payouts.
What would I look for? First would be a business area where I expected strong customer demand. But such a field often attracts lots of companies, which can push down profit margins. So I would zoom in on firms with some sort of competitive advantage, for example the unique distribution network of National Grid or the strong brand of Nike.
I would then have a look at a company’s balance sheet to see whether it had a lot of debt that might hold it back from paying dividends in future.
Aiming for my weekly income target
I would also consider whether a share’s price offered me good value as well as what its dividend yield is. That is the amount I would hope to earn each year in dividends as a percentage of the price I pay for the shares.
To target £100 a week, I would need to earn £5,200 each year from my dividend shares. If I invested in shares with an average yield of 5%, that would require me to spend £104,000 to hit my target.
A higher average yield could let me reach my target while investing less money. But I do not invest only based on yield. As dividends are never guaranteed, my primary focus is always finding quality businesses I think can produce surplus profits years into the future.
