I’d target £200 a month of extra income by spending £94 a week on shares

Our writer explains some nuts and bolts of how he would invest in the stock market to try and build extra income streams approaching £100 weekly.

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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?

To do that, I would need some sort of dealing account. So I would set up a share-dealing account or Stocks and Shares ISA.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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