One of the reasons I like investing in dividend shares as a way to try and earn passive income is that it really is passive.
I can buy some shares today, tuck them away while barely thinking about them, and hopefully earn passive income year after year for decades. Not only do I not need to put another penny in, those passive income streams may even grow .
It does not always work out like that. But with some care and careful consideration, I see buying high-quality dividend shares as a potentially lucrative source of long-term passive income.
Dividend shares can pay out a lot
To illustrate, let me use one FTSE 100 dividend share I think investors should consider: M&G (LSE: MNG).
The asset manager is in what I think is a great business. Demand is resilient and, because the sums involved are so large, the industry can be highly lucrative.
Thanks to its strong brand and large customer base, M&G is able to generate substantial spare cash. It aims to use quite a bit of that to deliver on its policy of maintaining or growing its dividend per share each year.
Now, dividends are never guaranteed at any company. That means no firm is ever certain to deliver on its dividend policy. That said, M&G has delivered an annual increase in dividend per share over recent years.
Currently, that stands at 20.1p. So, buying 10,000 M&G shares ought to deliver at least £2,010 in passive income per year.
More potential ahead
I say ‘at least’ because I am hopeful the amount will actually be higher. The 20.1p figure is based on last year’s dividend. But M&G has already increased its interim dividend per share this year.
It may be becoming apparent that the stock market is a place where things can change, for better or for worse.
That reflects the business reality that a company’s cash generation or simply its spending priorities can also shift. An uncertain stock market outlook might lead more people to invest, boosting M&G’s profits.
But it could also have the opposite effect. In recent years, the firm has struggled with policyholders withdrawing more funds than they put in. The first half of this year saw that change for the better, but I still see it as a risk.
At the current share price of £2.62, buying 10,000 shares in M&G would cost around £26,200. Not all investors have those sorts of funds. One of the things I like about investing as a passive income idea is that it can be cut to fit my cloth.
The same basic principles apply with buying more or less than 10,000 shares, but the expected passive income would change proportionately.
Being a smart investor
That has an impact when it comes to how to invest.
For example, the maximum annual contribution allowance for a Stocks and Shares ISA is £20k for most people. A Stocks and Shares ISA is not the only way to invest, though. There are also share-dealing accounts and trading apps, for example, though they may be less advantageous in terms of taxation.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Another important point to consider here is diversification. Whether investing much less than £26k, or much more, smart investors never put all their eggs in one basket.
