Here’s how I’d invest £100 a week in income shares to start earning passive income

Young Caucasian woman at the street withdrawing money at the ATM

Setting up passive income streams could let me earn money without needing to do any work for it. One way I can try to do that is by investing in income shares. The dividends would be passive income for me.

Here is how I might go about that by using a spare £100 per week.

How income shares can earn me money

Dividends are basically how a company shares excess profits from its business with shareholders. They can be financially lucrative. But dividends are never guaranteed and even a firm that has paid out in the past may stop doing so.

I would therefore look for income shares I reckoned looked likely to pay dividends in future. So I would look at a company’s business model and try to assess whether I thought it might be able to make large excess profits in future. For example, would there be strong customer demand for its products or services? Does the company have some edge over rivals that could support profitability? Could profits fund dividends, or would they be needed for other purposes such as paying down debts?

Choosing shares to buy

How would I go about finding shares that met such criteria?

I would stick to areas I understood, just like billionaire investor Warren Buffett does. That way I should be in a better position to assess a firm’s prospects. A company could still turn out to disappoint me, though, so again like Buffett I always diversify my portfolio across a number of companies.

One of the income shares I own that I think demonstrates this approach is Dunelm. I expect that long-term demand for homewares will be resilient. Dunelm’s unique product range, store network, and well-established brand give it a competitive advantage. Like all companies, it faces risks, such as a worsening economy leading consumers to spend less.

Dunelm is profitable and last year it declared ordinary dividends of 40p per share. Some has been paid already and some remains to be paid. Dividends are often not paid to shareholders for weeks or months after they are declared. As the current share price is around £8.89, that means Dunelm has a dividend yield of 4.5%. That is the annual dividend per share expressed as a percentage of the current share price.

Remember, though, that as future dividends are never guaranteed, it is only an estimate of what yield I might earn if I bought Dunelm shares today. Falling sales could lead Dunelm to cut its dividend in future. Or if it does well it may even pay a special dividend on top of its ordinary payout, as it did last year.

Totting up my passive income

So, how much could I earn by putting £100 a week into income shares?

That depends on the average yield of the shares I buy. £100 a week is £5,200 over a year. Investing that at an average yield of 4.5% (like Dunelm’s) ought to earn me around £234 a year in dividends.

There could be more to come, as that is only the start. If I keep saving into a second year, I could build up another pile of money to invest, while still hopefully earning dividends from the income shares I bought the previous year.

The post Here’s how I’d invest £100 a week in income shares to start earning passive income appeared first on The Motley Fool UK.

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C Ruane has positions in Dunelm Group. 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.