Some more money coming in on a regular basis without having to work for it? Yes, please! While such extra income may sound too good to be true, in fact the situation I just described is one that millions of ordinary people are in, thanks simply to owning dividend shares.
Even if I had zero savings and no stock market experience, I could start putting money aside on a regular basis to try and build a sizeable extra income. Here is how.
Owning dividend shares: an example
Imagine that I decided I like the look of retailer Dunelm (LSE: DNLM). It has a large customer base, proven business model and operates in a market likely to experience ongoing demand.
I also look for a competitive advantage when buying shares. I think Dunelm’s brand and large range of proprietary products help give it that.
The current Dunelm share price looks alright to me, as it trades on around 15 times earnings. I do not think that is cheap, but I would still consider paying such a valuation for a good business.
Dunelm yields around 3.9%, meaning that if I invest £100 today in Dunelm shares I would hopefully earn £3.90 in dividends each year just for owning the shares.
In fact, though, that yield excludes special dividends. Including them, the current yield is 7.5%.
Special dividends are not guaranteed, but then again neither are ordinary ones. That is why I try to find great businesses at attractive prices, that I think have strong future dividend potential.
Setting up passive income streams
Once I found such shares, how could I buy them?
Without a lump sum to invest in the stock market, I could drip-feed money in based on my own financial circumstances. That would let me buy dividend shares and start generating extra income.
Aiming for a target
In this example, imagine I put £200 each month into shares at an average yield of 7.5%, like Dunelm’s current yield when including special dividends.
I would spread it across different shares, to reduce the impact on my extra income streams if a share cut or cancelled its dividend (as Dunelm itself did in 2000).
Doing that, and reinvesting the dividends as I went along, after 15 years I ought to be earning around £4,860 of income annually. That comes out at about £94 per week on average.
But what if I wanted the extra income sooner?
I could then decide not to reinvest my dividends and instead take them out as I received them. That would mean I ought to start generating cash income from year one. The flipside is that it would take me longer to hit my weekly target (around 28 years altogether).
Taking either approach, I could start from nothing today and work towards earning a sizeable extra income.