A little extra money. Who wouldn’t be interested in that? In the current financial environment, in which it’s often hard to get a pay rise and savings account interest rates are low, I’m sure that most people would be keen to get their hands on a little extra cash.
Making extra money
In this day and age, there’s no shortage of ways to make a bit of extra money.
Taking a second job, or doing some part-time freelance work is one common way people are boosting their income. Others are taking advantage of the internet and making money from websites such as Airbnb, which enables you to rent out your house or a spare room, or Drivy, through which you can rent out your car.
Yet you don’t need a side hustle like that. Perhaps the easiest way to make some extra money and build up a second income stream is by investing in dividend stocks. Let me explain how this works.
What is a dividend stock?
Put simply, a dividend stock is a stock that pays out a proportion of the company’s profits to shareholders, in cash, on a regular basis. The payments are called ‘dividends’.
Ultimately, with a dividend stock, you receive a cash payment, perhaps twice a year, or maybe even four times a year, for doing nothing more than owning the shares. It really is that simple. In my view, dividend stocks would have to be, without a doubt, one of the easiest ways to generate a second income. So how much could you make?
How much extra cash you could make will depend on the stocks you invest in and how much you are willing to invest.
With dividend stocks, one of the key concepts to understand is the dividend ‘yield’. This is a similar concept to the interest rate offered from a bank account.
Whereas you might only be looking at an interest rate of 1% or so from a cash savings account right now, plenty of popular well-known dividend stocks have yields of 5% to 6%, or even higher, at the moment.
If you had £2,000 invested in a stock yielding 5%, your cash payout would be £100 (£2,000 x 0.05) per year. Invest £10,000 in a stock yielding 6% and you’re looking at £600 cash per year. Here are some real examples.
Dividend stock investing
Let’s start with Lloyds Bank. Currently, Lloyds’ dividend yield is 4.8%. So a £2,000 investment here could bring in £96 per year in cash dividends.
Similarly, Royal Dutch Shell, the oil giant, currently sports a yield of 5.7%. So, a £2,000 investment in this one could bring in £114 annually in cash dividends.
Finally, tobacco manufacturer Imperial Brands has a high current yield of 7.5%. So, a £2,000 investment in it could bring in £150 in cash dividends each year.
Of course, these are just three examples. There are plenty of other great dividend stocks listed on the London Stock Exchange. The more you invest, the more dividends you could receive.
It’s important to realise that dividend stocks are not risk-free. The shares prices of dividend stocks fluctuate, meaning you might not get back what you invested, and the dividends themselves are not guaranteed. However overall, the risk/reward ratio of dividend stocks is quite attractive, in my opinion. With dividend stocks, you can literally pick up money for doing next to nothing.
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Edward Sheldon owns shares in Lloyds Banking Group, Royal Dutch Shell and Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Lloyds Banking Group. 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.