What could be a practical way to try and start earning passive income, in a matter of months? My own approach involves owning a variety of dividend shares. Not only does that let me benefit financially from the work of some large companies without having to work harder myself, I also do not need a huge lump sum to start.
As an example, let’s say I had or could pull together £2,500 to invest. By splitting it evenly across the five shares below (which would give me the benefit of diversification), I should be on course to earn annual passive income of just over £190.
As I earn any dividends from shares for as long as I own them, hopefully I could keep generating income for many years to come. I would also still own the shares. They could increase in value over time, boosting my total returns further – although it is also possible that they may lose value.
High street names
Two of my choices are familiar names from the high street, as well as the online world. One is retailer Sainsbury’s. It has a dividend yield of 4.6%, while the other is 8.5%-yielding telecoms giant Vodafone.
Dividend yield is basically a way of expressing the dividends I will hopefully receive each year as a percentage of the money I spend on shares. Sainsbury’s is the lowest-yielding share in my portfolio of five picks. Overall, the average yield is 7.7%, meaning that my £2,500 would hopefully earn me around £192 in dividends over the coming year alone.
You may wonder why I do not simply invest in higher-yielding dividend shares to try and target more passive income. As well as considering the potential rewards of an investment, I also look at the risks. Sainsbury’s and Vodafone both benefit from well-known brands and large existing customer bases. But there are still risks for investors. The retailer could see online competition eat into profits, for example.
Meanwhile, I think Vodafone’s large debt pile means its dividend could be cut in future. As a Vodafone shareholder, I would certainly consider that risk if buying more of these shares. But I do think the juicy current yield helps to compensate for it.
High-yield FTSE 100 names
Both of those dividend shares are members of the FTSE 100 index of leading companies. So are my next two picks, which both yield at least 7%.
Lucky Strike cigarette maker British American Tobacco offers exactly that percentage payout — and has over-20-year track record of annual dividend increases. That does not guarantee what comes next, though, and I see declining cigarette usage in many markets as a risk to profits.
Meanwhile, financial services company Legal & General benefits from a well-established reputation in an industry. I expect to see sustained customer demand. Volatile stock markets are a risk to profits, but I like the company’s 7.2% yield.
Double-digit dividends
An even higher yield is offered by the Income & Growth venture capital trust, which offers 11.2%.
Those payouts could be cut if the trust’s investments in growing companies suffer, for example because the recession eats into their profits. But I like the trust’s strategy and its proven focus on shareholder rewards.
