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How I’d protect my financial future with a passive income from dividend shares

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With all the unexpected changes we’ve experienced in 2020, securing our financial futures has become an ever more important endeavour. Financially speaking, so many of us live life in the moment, never thinking much further ahead than the end of the month. This is all fine when the bills are being met and life’s ticking along, but it’s a disaster waiting to happen when circumstances change for the worse. For those with a little extra cash to spare each month, I think the stock market is a great place to invest for the future. And with dividend shares, I can even generate a passive income.

Is now a good time to invest?

Billionaire investor Warren Buffett says we should be greedy when others are fearful. What he means by this is that there are great stock bargains to be found when the majority are panic-selling. Buying shares in a downturn and holding them until positive sentiment returns is a method that’s made many millionaires. That’s one reason I think it’s a good time to start investing in the stock market.

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By putting money into the stock market, I’m able to grow my income and build wealth to protect my financial future. The key is to choose quality companies with a history of paying a dividend yield and a promising future outlook. Of course, with many quality companies suffering and dividends being cut, this is slightly harder in the current climate.

Choosing dividend shares

With the future still relatively unknown, stock picking becomes trickier. Nevertheless, I don’t think we should write it off as a bad idea. The FTSE 100 and FTSE 250 contain many fantastic UK companies. And I’m sure plenty of them will see their share prices soar in the coming five to 10 years (and possibly sooner if the world can get back to normal this year). By weighing a company’s strengths and weaknesses, I can make an informed decision and buy shares with confidence.

While the recent resurgence in Covid-19 cases has caused more restrictions, we need to remember the vaccine rollout is happening. This is so important because it provides hope in a time of anxiety. But asides from this, Britons have proved themselves to be very resilient and quick to adapt to change. As have UK businesses. The Office for National Statistics reported that November retail sales suffered less than expected during the second English lockdown. This is encouraging and gives hope that we’ll return to a new form of normality later in 2021.

With a passive income in mind

To protect my financial future, I’m researching stocks and making a list of great companies to buy in the coming months. To help build a passive income, those with a dividend yield or the likelihood of a dividend comeback are at the top.

When I consider a company’s future, I’m thinking five years ahead at a minimum. I want to generate a passive income, while building capital gains for a nest egg.

As an example, if I invest £250 a month, at an effective annual interest rate of 6% for 35 years, I can look forward to a substantial return of over £345k. Dividend shares help with compounding and boosting the annual rate of return. I like Buffett’s buy-and-hold approach to investing and think it’s a great way to get started. 

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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.