The idea of building extra income through lots of hard work may sound like a mixed proposition. But what if that hard work was someone else’s – and I benefitted from it? That is one reason to buy dividend shares. I could invest in companies like Barclays or BP. If they then pay out some profits to shareholders as dividends, I could get money as a reward just for owning the shares.
This idea can be very lucrative once put into practice – and I do not need vast sums of money to begin. In fact, I could start with nothing, putting aside £10 a day to invest in such shares. Here is how I would go about that.
Drip-feeding money
I am using £10 a day as an example, but it is an arbitrary figure. If my financial circumstances allowed, I could decide to put aside more, such as £20 each day. Equally, I could start with just a couple of pounds on a daily basis.
What I think is important is developing a mindset of saving regularly to invest. If I do that successfully, I will build a cash pile I can use to buy dividend shares.
As part of that process, I would set up a share-dealing account, or Stocks and Shares ISA in which to save the money.
Choosing shares to buy
But not all companies pay dividends, even if they have done so in the past.
On top of that, some shares pay dividends but the price of the share itself falls. So even if I hold it for the long term, I may make less in dividends than I lose if I sell the share at a far lower price than I paid for it.
For those reasons I am thoughtful about what sort of shares I buy to try and boost my income streams. I look for companies operating in industries I understand, as I think that helps me assess their business model.
I look for a competitive advantage that gives a company the power to set profitable prices without losing lots of customers. That is important as a company needs to be profitable if it is to pay dividends year after year.
Share price is also something I think merits careful attention. No matter how attractive a share may be, if I pay more than it is worth I could end up losing money on my investment.
Dividend shares I own
A couple of dividend shares in my portfolio help illustrate this approach. Dunelm and Victrex both have a competitive advantage in industries I expect to benefit from long-term demand.
But they are just some of the shares I own. That is because I always diversify my portfolio to reduce my risk in case a company disappoints.
Saving £10 a day would give me £3,650 per year to invest. That is a substantial sum. If I invested it in a portfolio with an average yield of 5% I should earn over £180 per year in dividends just from my first year’s share purchases.
