I can’t think of any easier way to make money than by generating a passive income from dividend shares.
Once you’ve bought your shares, you can simply sit back and wait for your dividend cash to drop into your account. With some well-known FTSE 100 companies offering dividend yields of more than 6%, I reckon the UK stock market is a great place to hunt for income.
Why choose shares?
Of course, there are risks. Dividends are never guaranteed, and the value of shares can fall. Unlike cash savings accounts in the UK, stock market investments don’t benefit from any protection against losses.
For these reasons, I think it always makes sense to keep some emergency savings in cash. But beyond that, I prefer to invest as much as I can in dividend-paying shares. My aim is to build a reliable passive income that will grow over time, staying ahead of inflation.
Although other income investments are available, such as property, one big advantage of shares is that it’s possible to get started with small amounts of cash.
By investing as little as £25 per month, I can start building an income portfolio. By contrast, getting started in property normally requires a big deposit and a mortgage.
Quick and easy
The simplest way to build a passive income is probably to invest in a cheap FTSE 100 index fund. This would allow me to receive the average dividend yield from the index, which is currently about 3.5%.
Investing in an index tracker fund is certainly easy. Low costs also make it a good choice for small, regular investments, in my view.
The only downside of investing in an index tracker is that not all companies pay regular dividends. By buying individual stocks and focusing on companies with high dividend yields, I should be able to increase the level of passive income I get from my investments.
At a time when inflation is high and interest rates are rising, maximising my income is important to me.
Buying high-yield shares
The FTSE 100 currently contains about 40 companies with forecast dividend yields over 4%. These come from a range of different business sectors, giving me the chance to diversify my passive income. This should help to provide some protection against future problems.
Among the high-yield stocks I’d buy for income today are housebuilder Barratt Developments (8.7%) and life insurer Legal & General Group (7.5%). I think British American Tobacco (7.4%) has potential too, despite ethical concerns.
Elsewhere, telecoms giant Vodafone offers a 6.3% yield, while packaging group DS Smith boasts a forecast yield of 5.9%. Lloyds Bank (5.7%), commercial property REIT Landsec (5.6%) and utility group National Grid (4.8%) also look tempting to me.
I’d aim for a portfolio of 15-20 dividend stocks, with an average yield of around 5%. Most of these would be from the FTSE 100. But I’d also look at smaller FTSE 250 stocks to improve diversification and seek out businesses with stronger growth potential.
This approach is similar to how I’ve built my existing portfolio. Over time, I’d expect it to provide a rising income plus long-term capital gains.
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Roland Head has positions in British American Tobacco, DS Smith, and Legal & General Group. The Motley Fool UK has recommended British American Tobacco, DS Smith, Landsec, and Vodafone. 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.