The idea of earning some extra money in the lead up to Christmas appeals to a lot of people. One way I could aim to do so would by investing in dividend shares. Not only could that likely earn me extra income before Christmas, I might keep earning next year and for decades to come without needing to invest another penny!
How dividend shares work
When a company makes a profit, it can decide what to do with its spare cash. One option is to reinvest it in the business, for example by taking on new staff or expanding to a different market.
But another option is to pay dividends. That means dividends are never guaranteed – they rely on a company being able to pay them and choosing to do so.
Many large FTSE 100 companies regularly pay sizeable dividends. Some, like Diageo and British American Tobacco, have even increased their dividend per share annually for decades.
So by building a portfolio of such shares, I could hopefully earn extra income in the form of dividends.
I mention the idea of a portfolio rather than an individual share because even a brilliant business can run into unforeseen difficulties. So I try to reduce my risk my diversifying across a range of enterprises.
Money before 25 December
When a company declares a dividend, it announces a date on which its shares go ex-dividend. That is the cut-off date to be on its shareholder register to qualify for that dividend. It also announces a payment date.
For example, today (30 October), Airtel Africa announced its latest dividend. The ex-dividend date is 10 November and payment is scheduled for 15 December.
That means that investors who buy the shares in the coming week and a half or so (and do not then sell them) ought to earn dividends before Christmas.
Hunting for quality shares at an attractive price
It may not be quite true that a dividend share is for life, not just for Christmas. But I do certainly take a long-term approach to investing. So whenever adding shares to my portfolio in the hope of earning extra income, I always think in terms of years or decades, not just months.
It could be convenient from a personal financial planning perspective to build a portfolio of shares that typically pay dividends at different points in the year. That may help to provide a fairly regular stream of extra income. Some UK shares even aim to pay dividends on a monthly basis.
But my main focus when hunting for shares to buy is always on finding businesses I think combine great long-term commercial prospects with an attractive share price. If I do that successfully, hopefully those firms can grow their profits over time and use them to increase their dividends.
That way, taking time to find the right shares to buy today could hopefully set me up for extra income not only this Christmas but across next year – and many years to come.