A little bit of extra income could often come in handy – or a lot! But the problem of working for extra income is that it can take time and effort.
That is why I try to supplement my earnings each month by investing in dividend shares. Dividends are the way a company divvies up some of its earnings among shareholders. Last year, for example, the retailer Sainsbury’s made profits of £677m. Of that, it paid £238m out to its shareholders as dividends.
So if I owned Sainsbury’s shares, I could have got some part of that payout as a dividend. If I kept the shares, hopefully I would keep receiving dividends in years to come that could supplement my income without me lifting a finger.
Dividend shares as ways to earn extra income
That is not guaranteed though. A company can always cut its dividend, for example if the business has a hard time or needs to spend money on something else. Indeed, you may have noticed that last year, Sainsbury’s only paid out a fraction of its profits in the form of dividends.
That is why I would invest in a variety of companies operating across a range of industries. Hopefully, that would reduce the risk to my second income streams if any one company I owned reduced its dividend.
Building up a dividend portfolio
If my target was £300 a month of extra income, I could do this in one of two ways. I could put in a lump sum upfront. But if I did not have the money available, I could save what I could afford regularly and build up to my target over time.
How much would I need? That would depend on the average dividend yield of the shares I bought. £300 is £3,600 per year. So if the shares had an average dividend yield of 5%, I would need to invest £72,000 to hit my target. If the average yield was 6%, like Sainsbury’s at the moment, I should be able to hit my target by investing £60,000.
Finding shares to buy
However, I would not select my shares based on their yield. Remember – dividends come out of profits. So I would want to buy shares in companies I reckoned had strong long-term prospects of making attractive profits. That could help them fund future dividends.
So I would look for companies with a business model I felt gave them a competitive edge in an industry I expected to see ongoing customer demand. I would also look at the business finances to see, for example, if it had a lot of debt that meant such profits might end up being used for something other than paying dividends, like servicing debt.
Once I had found shares that matched my objectives and struck me as attractively priced, I would start buying them – and moving closer to my goal of extra income.
The post Here’s how I’d target £300 extra income each month by investing in dividend shares appeared first on The Motley Fool UK.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J). 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.