Many of the big guns of British industry, like Shell and Unilever, are members of the flagship FTSE 100 index of leading shares. Some such FTSE 100 shares, including those two, pay regular dividends to their shareholders.
If I had a spare £5,000 today, a long-term perspective and wanted to target an average weekly income of £50, I would invest the money today in a handful of such shares.
Blue-chip businesses as passive income ideas
Of all the things I could do to try and earn extra income without working for it myself, why would I choose this one?
I figure that, rather than reinvent the wheel, by investing in proven businesses with big earnings potential I can expose myself to existing large-scale business success.
That said, no dividend is ever guaranteed even when it comes to Footsie shares.
Shell cut its payout in 2020, for example. So I would split my £5,000 evenly over five different stocks, a simple risk management strategy known as diversification.
Five shares I’d buy today
Specifically, I would buy the five shares below.
In financial services, M&G and Legal & General would be on my shopping list (in fact I already own some shares of both). I think they have similar strengths: well-known brands, high customer demand and sizeable existing client bases. A risk for the two firms is that choppy markets could lead clients to pull money from funds, hurting profits.
I would also buy British American Tobacco. Its speciality is evident from its name. Cigarettes remain big business and massively cash generative for the company, although declining usage is a risk to revenues and profits. The business is also growing non-cigarette product sales quickly.
Telecoms giant Vodafone is another of the FTSE 100 shares I already own — and would be happy to buy more of. It faces challenges including strong competition and the expense of maintaining a huge network. But it has a strong position in multiple markets throughout Europe and Africa.
My fifth pick would be packaging maker DS Smith. I like its manufacturing footprint in an industry in which I expect to see long-term growth, although price competition is a risk to profit margins.
Building a passive income stream
Those five shares have an average dividend yield of 8.9%. So if I invest £5,000 in these shares today I would hopefully earn around £445 per year in dividends.
That would be welcome, but is a far cry from £50 a week. That adds up to £2,600 per year.
So, what would be my plan be?
I talked above of taking a long-term view. If I invested £5,000 in a portfolio with an average yield of 8.9% and compounded the dividends, after 21 years my portfolio should be throwing off an average £50 per week in dividends.
That is a while to wait. My example presumes flat share prices and dividends, but in reality they could move up or down.
But the point seems clear, that by compounding dividends from the right shares in my Stocks and Shares ISA, over time I could hopefully reap sizeable income streams by investing in carefully chosen shares today.
