Investing in dividend shares can be a great way to earn extra cash. And after doing the work in figuring which stocks to buy, there’s nothing else to do but let the cash roll in.
Investing in dividend shares works best for an investor who has time to let their returns compound. But even starting at 50 with no savings, I think I could give my monthly income a meaningful boost.
Beware of big yields
To start earning extra income, it might be tempting to look for stocks that have high dividend yields. But doing so can be risky, so investors like me need to proceed with caution here.
A high yield can be a sign that the dividend is unsustainable. Persimmon is a good example of this.
Last year, the business distributed £2.35 in dividends per share. Based on the share price 12 months ago, that’s a yield of around 10%.
There’s a catch though. A weaker housing market means Persimmon’s dividend this year is likely to be around 75% lower than it was in 2022.
That means shareholders are set to receive a lot less income than they did last year. The return for 2023 is likely to be under 3% for an investor who bought the stock 12 months ago.
Persimmon’s business is highly cyclical, meaning it’s likely to pay a strong dividend in good times, but struggle when things are tougher. Investing at 50, I’d look for something a bit more stable.
Stability
A stock that looks a bit more promising to me is Unilever. The company’s products enjoy relatively steady demand – in a recession, people still need to buy food even if they don’t need to buy houses.
At today’s prices, Unilever shares have a dividend yield of around 3.5%. That’s not earth-shattering, but I think it’s enough to make a difference, especially as the company’s dividend is growing.
I don’t expect the stock to be materially affected by an economic downturn. But that’s also not to say that the stock is entirely risk-free.
The biggest danger I can see with Unilever shares is that its management might make a mistake in trying to grow earnings. Last year, the company attempted to acquire Haleon from GSK for £50bn.
With Haleon now having a market value of around £29bn, it looks like Unilever were in danger of overpaying. This kind of move could, if done badly, be destructive to shareholder value.
Nonetheless, if I were starting my investing journey at 50, I’d look for stocks that could provide returns in any economic climate. And I think Unilever would be a decent starting point.
Better safe than sorry
It’s not impossible for a stock with a big dividend yield to prove durable, over time. I’ve heard others say the 8% yield on offer from Legal & General shares looks durable.
I don’t know whether they’re right about this – life insurance is a complicated business. For a stable boost to my monthly income, I’d look for shares in companies that are easier to understand.
