Owning income shares can be a lucrative source of dividends.
In fact, right now, the yields on many British shares look very tasty to me.
In the FTSE 100, for example, Phoenix, Vodafone, M&G, British American Tobacco, Legal & General, Taylor Wimpey, St. James’s Place and Imperial Brands all yield over 8%.
The FTSE 250 index also has a number of shares yielding that much. I count no less than 22 FTSE 250 shares that currently have yields over 8%, from 21% yielder Diversified Energy to 8.2%-yielding Foresight Solar Fund.
There are a lot of investment funds offering juicy dividend yields too. For example, one I have been eyeing in recent months as a possible acquisition for my portfolio (Henderson Far East Income) yields 9%.
Clearly, not all income shares are made equal. I would be surprised if all of those dividends survive at their current level in coming years. But I expect that some will, and may even grow. Here is how I would spend £8,000 in this potentially lucrative market to aim for a monthly passive income of £500 over the long term.
First, ignore yield!
Having started by zooming in on dividend yield, I need to explain that that is not how I select shares to buy.
After all, dividends are never guaranteed. Direct Line would have made my above list at the start of this year but its dividend is now a big fat zero.
Instead, I try to zoom in on companies I think have a strong business with a sustainable competitive edge – and an attractive share price.
Only then do I look at yield. Still, some of those high-yield income shares meet such criteria for me. I have already bought Vodafone, British American Tobacco and Legal & General shares this year, for example.
Aiming for a target income
Still, if I invested £8,000 in shares yielding 8%, that would earn me around £640 per year. That is far beneath my target of £500 per month.
Such an approach would mean that, after 30 years, I ought to be earning an average £500 per month in dividend income.
If that wait sounded too long, I could always start receiving the dividend income earlier, although in that case I may need to set a more modest target for how much I would hope to earn each month.
Today’s market conditions will not go on forever (and many even change before tomorrow).
It may be possible a year or two from now to get some high yields like we currently see in the FTSE 100 and FTSE 250.
But that is not guaranteed.
That explains why, like many investors, I am taking advantage of the current market by buying income shares now to hold for the long term.