People do not always think about the future, but it lies ahead of us all. Thinking about how to earn money in future as well as now seems like prudent financial planning, in my view. Buying shares with an eye to holding them for the long term is one way I hope to earn extra income.
Doing that could help me set up extra income streams for when I retire, for example.
It does not need to be a costly approach. If I could spare just £3 a day, here is how I would put it to work to try and set up long-term income streams.
Earnings dividends from proven blue-chip businesses
The income streams I have in mind are the dividends some businesses pay when they generate extra cash they do not need.
So I would be looking to buy shares in large, blue-chip businesses I expect can continue to generate such cash flows and hopefully pay them out as dividends.
Nothing is ever guaranteed in life – and that is certainly true of dividends, even when a company has paid them before. So I would use my £3 a day to build a portfolio of different high-quality shares I think can pay juicy dividends in future.
To get the ball rolling, my first move would be to set up a share-dealing account or Stocks and Shares ISA. In fact, I would do that today and put my first £3 in, starting the habit as I mean to continue.
Finding income shares to buy
But while that sounds simple, what about choosing the shares I hope will pay me my extra income?
That takes time and some effort. I would want to research carefully to find shares I felt offered me a stake in a good enough business at a reasonable enough price.
To illustrate the sort of share I am looking for, we can take British Land (LSE: BLND). I do not own the share — but I think it helps show some of what I am looking for when hunting for income shares.
The commercial landlord is in a market I expect to see very long-term demand. Perhaps office demand will come down, hurting sales. Maybe online shopping will lead to more retailers closing their physical stores. But over time, the prime property British Land owns can be repurposed.
That estate is unique. Only British Land owns its prime Paddington Central development. If a business wants to site itself there, its landlord will be British Land. That gives the FTSE 250 property developer pricing power. The shares have a 5.4% dividend yield.
In today’s market though, I think I could do even better! That 5.4% is already above the average FTSE 250 yield, but I believe I could earn a 7% yield sticking to blue-chip shares.
Using a long-term approach to my advantage
Instead of taking extra income now, I would reinvest the dividends to buy more shares. That is known as compounding.
Putting in £3 a day and compounding at 7% annually, after 15 years I would be earning extra income of £5 a day, on average. I could keep compounding – or start spending!
