Is it possible to earn extra income without working more hours? It certainly is. One way I try to do that is by investing in shares that pay me dividends.
Here is how I could use that approach to target an average extra £100 per week of income.
Why I like buying dividend shares
Some people try to earn extra income by putting their money into a side business, like a café or shop. So why do I prefer to own shares?
I can invest as little or as much as I want. I do not need to get involved in running the business at all. Plus, I am not limited to small businesses – I can buy a stake (albeit a tiny one) in world-beating giants like Apple and Shell.
Choosing shares to buy
Not all companies pay dividends though, even when they are successful. Indeed, Apple had a long run of making big profits but not paying dividends. There were no payouts from the tech giant between 1995 and 2012, just as Facebook parent Meta does not pay a dividend now.
So when hunting for income shares to buy, I look for certain characteristics.
One is the ability to generate large amounts of surplus cash. For example, does a firm operate in a field I expect to benefit from high customer demand? Does it have some unique advantage that can help it be successful, like the unique brands owned by Unilever or patents held by AstraZeneca? If so, that could be a promising foundation for future profitability.
I then consider whether the company seems likely to use any such spare cash to pay dividends. If a firm has huge capital expenditure requirements or large debt, for example, it may use cash on those needs rather than pay dividends.
Price also matters. So I only buy shares when I think they trade at an attractive price.
Building an extra income stream
By doing that and building a diversified share portfolio, I could aim to grow my income.
The amount I can hopefully earn depends on how much I invest and the average dividend yield I achieve. However, I would not simply chase yield. Instead I would focus on finding shares in great companies selling at an attractive price.
If I wanted to target £100 in extra income each week from shares, that would add up to £5,200 in a year. At an average yield of 5%, for example, that would require me to invest £104,000.
I could do that as a lump sum, or drip-feed money regularly into an investment account, such as a Stocks and Shares ISA. Doing that with whatever I can afford now, I could hopefully build up to my target over time — and earn at least some extra income as I go.
