Want extra income? I’d invest £1,150 in this share today for £100 a year

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.

The idea of earning money without the hard grind of work sounds great in theory. In practice, some ideas to involve extra income still involve a lot of work. That is why I like buying dividend shares. I can benefit from additional income streams without needing to work more hours each week.

Here is an example, which should earn me another £100 a year for zero work.

Dividends as a form of income

Dividends are basically the way a company distributes the profits it does not need to run the business. That cash pile is divided up among shareholders based on how many shares in the firm they own. The payment is known as a dividend.

The thing I like about this is that it can let me benefit from the hard work and business model of large, blue-chip companies. I get some of the profits without needing to do any work. But one thing I do not like is that dividends are never a certainty. Not all businesses pay them. A company that has been paying dividends can decide to them if profits fall, or even cancel them altogether. That is one reason I spread my portfolio of dividend shares across different companies. In investing terms, that is known as diversification.

£100 in annual extra income

Within a diversified portfolio, I would be happy to buy shares in a company I felt had a solid business model and attractive dividend prospects. Those prospects partly depend on what I pay for a share. The dividend per ordinary share received by different shareholders is the same. But if they bought their shares at different prices (for example because the purchases were not at the same time), the dividend as a percentage of the price paid will vary.

For example, if I paid £100 for a share that paid £3 per year in dividends, my annual income would be 3% of the purchase price. That is known as the share’s dividend yield. But if my neighbour paid only £50 for the same share, her yield would be 6%.

One company I like with an attractive dividend is M&G (LSE: MNG). I own it in my portfolio already. At the moment, the M&G dividend yield is 8.7%. That means that If I spent another £1,150 on M&G shares today, I would hopefully receive just over £100 in annual income for as long as I held the shares.

M&G dividend outlook

Things might turn out even better than that in practice. M&G has a policy of trying to maintain or grow its annual dividend. So the extra income I receive from it in future years may grow.

But as dividends are never certain, the future payout could turn out to be smaller too. I think M&G’s strong brand, large customer base, and deep experience in providing financial services are competitive strengths that could help it make profits in future. But there are risks too. For example, a recession could lead customers to withdraw funds, reducing M&G’s profits.

I am happy to hold M&G as part of a diversified portfolio to help reduce the potential impact of such risks to my extra income streams. Hopefully I can effortlessly benefit from M&G’s earnings for a long time to come!

The post Want extra income? I’d invest £1,150 in this share today for £100 a year appeared first on The Motley Fool UK.

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Christopher Ruane owns shares in M&G. The Motley Fool UK has no position in any of the shares mentioned. 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.