Buying dividend shares is one way to try and earn passive income. Sometimes, FTSE 100 income shares like Vodafone and Imperial Brands get a lot of attention from investors for their dividend potential.
But there are plenty of FTSE 250 shares that offer passive income potential too. Here is one I would buy now if I had spare cash and wanted to target an extra £100 in income each year.
Lots of businesses, one share
Specifically, the FTSE 250 business I am eyeing is an investment trust.
Investment trusts typically buy lots of different shares themselves. So by buying a share in one, I am effectively getting a form of diversification. I would still spread my portfolio across more than one share, but I do like the fact that owning shares in an investment trust can help me diversify.
The FTSE 250 share I am eyeing is City of London Investment Trust (LSE: CTY). Its portfolio is focused on blue-chip British shares. At the moment, for example, its three biggest holdings are Shell, BAE Systems and RELX.
Outstanding dividend track record
City of London Investment Trust pays dividends each quarter. That could come as a welcome boost to my passive income streams. It has also raised its dividend annually for over half a century.
That is quite the track record – and I am sure the trust managers are keen to maintain it! After all, the outstanding dividend history is probably what attracts many investors to the trust and earns management fees.
For me, a track record is just that, a record. It does not tell us what will happen in future. Dividends are never guaranteed.
Some possible risks
So what might go wrong here? One risk is that the trust’s share portfolio produces less income, for example because the companies in which it invests cut their dividends. Shell did just that in 2020, after all.
But good management could hopefully cope with that risk. City of London was able to keep raising its dividend annually during the pandemic – and the global financial crisis, the dotcom bust, the 1990s recession, the early 1980s recession and the oil crisis in the 1970s!
Aiming for an income target
At the moment, the share yields 5.1%. That is far from the highest in the FTSE 250. But I would still be happy with such a yield.
Each share is on course to pay 20.2p in dividends in the trust’s current financial year. So to try and earn £100 annually in dividends, I would need to own 496 shares of City of London Investment Trust.
The shares currently sell for under £4 each. That means I would be looking at spending under £2,000 (specifically, around £1,941) to buy my stake.
