Here’s how I’d invest £500 in dividend shares to generate lifelong passive income

Tired woman sleeping on London underground

Many passive income ideas actually involve a lot of time or effort. That is one reason that I like to earn extra income by investing in dividend shares. I can do that for almost no effort. It does not take up much time, although I would make sure I did some research to understand what I was getting into.

Of course, to buy shares, I will need some money I can invest.

That does not have to be a big hurdle, though. I can start with a fairly modest amount. For example, if I had a spare £500 today and wanted to try and set up passive income streams for the rest of my life, here is how I would go about it.

Always stick to healthy investment principles

One mistake some people make when they have limited funds is to try and take shortcuts, hoping they can improve their returns. For example, a key risk management principle when investing is to diversify across different shares. The idea is that, even if one company performs much worse than expected, its negative impact on the overall portfolio will be limited.

£500 may not seem like a lot of money with which to diversify, especially if I have to pay separate dealing fees for each company I invest in. But sensible investment principles remain the same whether I am investing £500 or £5,000. So I would buy a variety of dividend shares and not just put all my money into one choice.

How could dividend shares produce durable passive income?

When people talk about dividend shares, what they really mean are those that currently pay dividends. Almost any share could pay one at some stage. By the same token, no stock is guaranteed to pay out even if it has done so for decades. Shell reduced its dividend in 2020 for the first time in over seven decades.

But hopefully, if I choose the shares carefully, I will get a stream of payouts in future. I will be entitled to any dividends for as long as I hold the shares. So, if I do not sell my holdings and the companies keep coming up with the goods, I could set myself up for lifelong passive income.

I need to be realistic about my expectations, though. How much extra income I earn depends on what is known as the dividend yield of the shares I buy. To stick with Shell as an example, its current yield is 3.5%. If I invested £500 in a range of different shares yielding an average of 3.5%, I would hopefully earn over £17 a year in passive income. If the companies raise their dividends in future, my passive income could grow.

Finding shares to buy

I could try to get double the passive income simply by buying shares with double that yield.

Does that mean I should just build a high-yield portfolio? No – not one just based on yield, at least.

I want to find shares in companies with strong future profit potential that I think could help fund dividends long into the future. If they also have a high yield, that could boost my passive income streams. However, I would start my search not by looking for yield but for great businesses at attractive prices.

The post Here’s how I’d invest £500 in dividend shares to generate lifelong passive income 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 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.