Looking for dividend shares to earn passive income? 2 things to consider

Looking for some passive income streams in 2026 (and beyond)? Many people do just that at this time of year. While some people’s attention may turn to the idea of running their own business, others are happy to let other people do the hard work. So they buy dividend shares, hoping to earn a stream of money without needing to work for it themselves.

Such an approach can be lucrative. There is also the possibility that the shares will go up in price too, offering a capital gain (though it can be that they go down).

Here are a couple of things to think about when looking to build passive income streams by buying dividend shares.

Look to the future, not the present or past

Sometimes people look at what is known as the dividend yield of a company and get excited.

The dividend yield is what one expects to earn from a share per year in dividends, expressed as a percentage of the price paid for the shares. So, for example, B&M European Value Retail (LSE: BME) has a dividend yield of 8.2% right now.

That suggests that £100 invested in the share today could potentially earn around £8.20 each year in dividends, even before taking into account special dividends. B&M has paid them in recent years.

But things can change. B&M has been struggling with a few things, such as making its consumer goods proposition compelling enough for customers. There is a reason the shares have more than halved over the past year. That 8.2% yield is based on the current payout. There is no guarantee that will last in future.

When looking at dividends, it can be tempting – but dangerous — to focus on a company’s track record.

But dividends are never guaranteed. So it is important to look at a company’s business prospects, its likely cash flows, and also its spending priorities.

For example, even if B&M has enough spare cash to declare a special dividend this month, the directors may decide that they prefer to hang onto spare cash to invest in the business, instead of paying it out to shareholders.

Consider the opportunity cost

That illustrates a conundrum many business leaders face: should they use cash to try and grow the business (or even just maintain it), or to reward shareholders?

For a mature business in a declining industry like British American Tobacco, there may be limited new growth opportunities. That helps explain why the share offers a 6.2% yield – and has grown its dividend per share annually for decades.

But for some companies there are growth opportunities aplenty. Using spare cash to pay chunky dividends may please shareholders in the short term — but it may reduce the long-term growth opportunities.

B&M could invest more in its French operations, for example, instead of maintaining its current dividend. Or it could sacrifice profit margins to try and boost flagging consumer goods sales.

That said, shareholders rarely appreciate a dividend cut. Management always needs to tread carefully when setting spending priorities.

B&M has a proven business model and I think it can stay solidly cash generative. So I plan to hang onto my shares in the retailer.  

But would I be smarter to sell and invest the money instead in a growth share? Time will tell!

The post Looking for dividend shares to earn passive income? 2 things to consider appeared first on The Motley Fool UK.

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C Ruane has positions in B&M European Value. The Motley Fool UK has recommended B&M European Value and British American Tobacco P.l.c. 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.

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