Earning a bit of extra income could help with everything from paying an unexpected expense to saving up for a holiday. But how to do it without squeezing more hours into the working week?
One way I (and millions of other people) use is buying shares in the hope that I will be paid cash simply by owning them. That sort of payment is known as a dividend, I think dividends could end up generating sizeable extra income for me down the line.
I do not need savings to do that and could get going with just a few spare pounds each day. As an example, here is how I would go about trying to earn almost £900 each month in dividend income by putting aside £5 per day.
The long-term approach
First, I think it is important to be realistic about what to expect. £5 a day adds up to £1,825 per year (with an extra fiver this year as this month is a leap month!)
But… £890 per month adds up to £10,680 of extra income per year. That is more than five times the yearly saving from £5 each day!
How on earth could I hope to generate such a return? The answer is: long-term investing.
I would save the money regularly for years to come. Initially, I would also reinvest the dividends, to help me buy more shares on top of those I could afford from my £5 each day. That is known as compounding and could help me reach my goal more quickly.
The role of yield
Still, it will be a long-term endeavour.
Imagine I could earn an 8% compound return per year on my investments. If I put £5 a day into a share-dealing account or Stocks and Shares ISA and compound my gains at 8% annually, I will be able to generate my £890 monthly extra income within 25 years.
Is an 8% annual return feasible?
I think it could be. That could be made up of dividends, capital gain due to share price growth, or both.
But what is important is buying the right shares. I would not invest in a share just because it had a high dividend yield. Dividends are never assured. Instead, I would focus on finding the sort of businesses I though had excellent commercial prospects over the long term and attractive valuations today.
An example I would happily buy if I had spare cash to invest is Legal & General (LSE: LGEN). It is yielding 7.8% right now.
I would diversify my holdings over a number of different such shares.
Finding shares to buy
Why would I buy Legal & General?
It ticks a number of boxes for me. It operates in markets I expect to have large, enduring customer demand. The FTSE 100 firm has a long history, well-known brand, and deep financial markets expertise.
Owning Legal & General shares in the past has not been all smooth sailing. The company cut its dividend after the financial crisis in 2008. I see a risk the same could happen if another financial crisis hurts investment returns and demand for Legal & General’s products.
As a long-term investor, though, I believe that owning shares like Legal & General could help me build meaningful extra income streams.
