One of the ways millions of people (including myself) earn passive income is buying shares in blue-chip companies like Vodafone and NatWest.
That does not take a lot of money. In fact if I was to start buying shares for the first time, I could do so using just a few pounds a week. In the example below, I use £10, but everyone’s financial circumstances are different.
Not only do I think this approach could be lucrative – I think it may be especially so just now.
Why 2024’s a good year for passive income
Dividend shares compete against banks as a place for people to deploy their money. (Shares carry a risk of capital loss or gain, but that is not typically the case with a bank account).
One effect is that, when interest rates are high, dividend yields also sometimes increase. A combination of high interest rates and weak global interest in UK shares means that many yields in the London stock market are unusually high at the moment.
Currently, for example, Phoenix (LSE: PHNX) yields 10%, M&G yields 9.5% and Vodafone yields 9.9%, although it has announced plans to halve its annual dividend per share.
As Vodafone shows, no dividend is ever guaranteed. That is why I diversify my portfolio across a few different companies.
On a historical basis, the sorts of dividend yields we have seen from some FTSE 100 shares over the past several years are high. That is still true in 2024 but may not last. That is one reason I would start investing now rather than waiting.
What I look for
When it comes to buying dividend shares in the hope of earning passive income, I look for a company I expect to keep generating more cash than it needs to run its business. This can be used to fund shareholder payouts.
Phoenix is an example. Its market of financial service is huge. The sorts of insurance and pension products it deals in see sizeable customer demand. I expect such demand to remain high long into the future.
But such markets can attract lots of companies trying to get a slice of the action, hurting profitability. So when investing, I look at what assets a firm has that can help set it apart from rivals. In the case of Phoenix, these include a large customer base, well-known brands including Standard Life, and deep financial markets expertise.
There are risks. For example, a property crash could lead to lower values, bringing down the worth of Phoenix’s mortgage book.
But I like the company’s business model and would consider buying it to build my passive income streams, if I had spare cash to invest.
Having a target
Phoenix’s double digit percentage yield is unusually high for a FTSE 100 company. But with yields as they are, I think I could realistically target an average 7%.
If I invested £10 a week for five years at that level and reinvested my dividends, I should then be earning around £216 each year in passive income.
My first move today would be to set up a share-dealing account or Stocks and Shares ISA and start putting £10 each week into it.
