Could buying shares that pay dividends be a lucrative way to build a second income?

It could – and for many people it already is. What does it take — and what sort of income might it generate?

The mechanics of dividend shares and passive income

Answering those questions requires some explanation about what dividend shares are and how they can work.

Shares can pay dividends, which are basically one way for a business to use some of its excess cash. Not all do though. Perhaps they do not generate enough excess cash, or do but choose not to spend it funding dividends – even if they have paid them in the past.

That helps explain why savvy investors spread their portfolio across a diversified range of shares and rather than just look at a share’s current payout, they try to gauge what they think it might pay in future.

How large a second income might be earned depends on how much is invested – and at what dividend yield.

Yield is basically the annual dividend earnings, expressed as a percentage of what the shares cost to buy.

Aiming for a four figure income

Say, for example, that someone earns a 5% yield. That is well above the current FTSE 100 average but, in my opinion, still well within the realms of possibility while sticking to proven blue-chip businesses.

Investing £100k at that level ought to earn a £5k second income annually. That could be done as a lump sum. Alternatively, it could be the result of drip feeding money in.

That could be £20k a year for five years – although if dividends are reinvested along the way, that timeline could speed up.

On the hunt for shares to buy

Given that dividends are not guaranteed, what sorts of shares might make sense for such a second income plan?

As I mentioned above, I think it is wise to diversify across a range of shares that look like they have strong dividend potential. For example, they may have a competitive advantage in an industry with resilient customer demand, and strong free cash flows.

It is also important not to overpay for shares. Even though a second income from dividends is the goal, the price paid matters. It affects the yield earned. Also, overpaying could mean an investment ends up resulting in a capital loss.

Here’s a share to consider

One share I think investors should consider for its income potential is British American Tobacco (LSE: BATS). Some investors may have ethical objections. Others may wonder whether the Lucky Strike maker can fend off the risk of falling cigarette sales eating into revenues, something that has already happened for a couple of years in a row.

I recognise that risk. But British American has decades of experience dealing with declining demand in some markets, combined with increasing regulation.

It is massively cash generative and its portfolio of premium brands gives it pricing power. Having grown its dividend per share annually for decades, the yield is now 5.2%. That is above the 5% target I mentioned above.

If it can successfully navigate the demand risk facing its industry – for example by increasing its non-cigarette sales – I believe the FTSE 100 company could potentially keep paying big dividends.

The post How much would it take to earn a £5,000 second income annually from dividend shares? appeared first on The Twelfth Magpie.

More reading

• Just 97 shares of this UK dividend stock generate £238 in passive income

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

If you have ever thought you might want to start buying shares but never made the move, you are far from alone.

One reason many people do not put their dream into action is a perception that it can take a lot of money to invest in the stock market.

In reality, though, as summer approaches and many people are eyeing the idea of weekend getaways that could cost a couple of hundred pounds or more, that same amount could be put to use as a way for someone to start buying shares.

Here’s what it takes

The money needs to be put somewhere where it can be practically put to that use. A share-dealing account or Stocks and Shares ISA should work for that.

A few hundred pounds is enough to diversify across multiple shares, a simple but important risk management strategy.

Before venturing into the stock market, someone should understand at least some key elements of how it works. A good business is not necessarily the same as a good investment, so learning how to think and act like a good investor is important

A small start, but a start

It is also important to be realistic about expectations.

When many people decide to start investing, they understandably focus on the excitement of what could happen.

In practice, though, what could happen and what actually ends up happening are not necessarily the same thing. It is important to avoid being unrealistic partly because that can lead people to take poorly considered risks.

If someone starts buying shares, learns along the way, and gains confidence to invest more over time, I think they could do better than if they get into something they do not properly understand and act rashly.

Here’s a share to think about

As an example of a share I think someone who wants to start investing should consider, I can point to ITV (LSE: ITV).

Now, I said above that investors always need to be mindful of risks and that is true here.

ITV’s operating landscape has changed dramatically from the days when families all gathered around the goggle box in their living room. A far broader spectrum of entertainment options is now available, fragmenting the audience.

That poses a risk to ITV’s revenues and profits. But it also gives the FTSE 250 company some opportunities

The company has expanded its own digital offering substantially in recent years. It also has a studio rental and production business that means it can actually benefit from other content producers making shows.

The ITV share price is in pennies, 35% below where it stood five years ago.

But I think that undervalues the long-term prospects for the company. In addition to that, ITV offers a dividend yield of 6.1%. That could potentially mean ongoing passive income stream for shareholders, if the dividend is maintained.

The post Here’s how someone could start buying shares for the price of a weekend break appeared first on The Twelfth Magpie.

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• How to invest £125 a month in UK shares to target a £39,039 annual passive income

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.

It is now a little over a month since the start of the current tax year, opening up another contribution allowance for investors to put more funds into their Stocks and Shares ISA (or start one for the first time).

That means that there are almost 11 months left for an investor to consider how best they might use this year’s ISA allowance.

Still, waiting till the last minute is unnecessary. Smart investors are already thinking about how best to utilise this year’s allowance.

Tailoring an approach to your own investment objectives

One of the things I like about the Stocks and Shares ISA structure is its flexibility. Investors can invest in a way that suits their own style, objectives, and risk tolerance.

For example, they might decide to put the money into an index tracker. Over the past year, the FTSE 100 is up by a fifth. So £20k invested in a FTSE 100 tracker a year ago ought to be worth around £24k already.

On top of that there have been dividends. They ought to have added around £740 over the past year.

But tracker funds often charge fees that can eat into returns. So choosing a suitable one matters.

Come to that, the same thing is true of Stocks and Shares ISAs, so it makes sense to shop around when looking for one that best suits your own needs.

Looking beyond the blue-chip index

The FTSE 100 is not the be all and end all of index tracking, though.

Investors focussed on medium-sized companies may be more interested in the FTSE 250, for example.

Over the past year, it is up 12%. Not as good as the FTSE 100, but still enough to turn £20k a year ago into £22,400 now even before considering dividends.

There are other indexes too, such as the FTSE All-Share.

Or an investor could choose to look at putting their Stocks and Shares ISA to work by investing in funds that are not trackers.

Their performance is influenced by how well fund managers do as well as what is going on in specific markets or geographies. Again, paying attention to fees is important – actively managed funds often impose higher ones than passive income trackers do.

One fund that has performed well in the past year is the Schroder Japan Trust. A 45% gain would have turned a £20k Stocks and Shares ISA into £29k.

By contrast, Finsbury Growth and Income Trust’s 18% fall means a £20k ISA would now be worth £16,400. Its 2.7% yield does not even match the FTSE 100’s.

Individual shares are worth a look

My Stocks and Shares ISA is concentrated in individual shares, not funds.

I have recently been buying Campbell’s (NASDAQ: CPB). The iconic US food company has a dividend yield of 7.3%. Its price-to-earnings ratio of 12 looks good to me for such a quality company.

Sure, it has challenges and declining revenues point to them. Packaged food is becoming less popular. The Middle Eastern conflict could push up input prices, hurting profit margins.

In the short term, then, there may be problems.

Longer term, I see this as a bargain. The firm has strong brands and a well-established distribution network. It is highly cash generative – and I believe it can stay that way.

The post £20k invested in a Stocks and Shares ISA this time last year is now worth… appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

C Ruane has positions in Campbell's. The Motley Fool UK has recommended Finsbury Growth & Income Trust Plc. 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.

Ever worried about what the impact of a stock market crash might have on your retirement income? What if you end up buying an annuity when the market is badly down?

Such concerns are understandable – a crash can be a scary thing. In reality though, a stock market crash may actually be brilliant news for someone looking ahead to their retirement and hoping to retire early.

An opportunity to buy more for less

That is because of what happens during a market crash. Typically, a large number of shares become available at a much cheaper price (the standard definition of a stock market crash is a fall of at least 20% in short order).

Some of those shares suddenly get cheaper because they were badly overvalued. Or perhaps their future prospects have worsened due to a weakening economy. Some shares that fall during a crash never recover.

But others are shares in blue-chip companies whose long-term prospects ultimately turn out to be largely unchanged. So they might suddenly be available at a terrific price.

Such windows of opportunities can be short-lived, so it pays to be prepared. For example, I see now as the best time to make a list of great companies I would like to invest in, if I could do so at attractive prices.

If I wait to start thinking about that when the next crash comes (whenever that might be) I may not then have enough time to act.

Retire sooner… like this

In practice, taking that proactive approach could mean that somebody hits their retirement goals sooner. For example, HSBC (LSE: HSBA) currently offers a dividend yield of 4.1%. That strikes me as attractive and is well above the FTSE 100 average.

Compounding £10,000 at 4.1% annually, it would take 18 years to double in value. I ought to add that, in practice, share price changes would affect this, not just dividends, but I use this example for the sake of simplicity.

But someone who bought HSBC shares in the dark days of autumn 2020 would since have seen their holding rise 376% in price.

Not only that, but they would now be earning a yield of around 19.5%. Compounding at that rate, £10,000 could be doubled not in 18 years but in just four!

I’m getting ready while I wait

In fairness, there were concerns in 2020 about what lay ahead for banks, including HSBC. The dividend was suspended.

I do not plan to buy the share now, partly for similar reasons. I have concerns about what the risk a weakening global economic outlook could have for bank profits.

HSBC’s heavy Hong Kong exposure means that global trade flows can ultimately have a significant impact on its business.

After the share’s stunning rise in recent years, I do not feel the current price offers me sufficient margin of safety for that risk. That is despite HSBC’s proven model, strong profitability today and large customer base.

But the point is clear. Being prepared to swoop in and grab blue-chip bargains during a stock market crash can help someone achieve their retirement financial goals years or even decades early.

The post Here’s how a stock market crash could actually be great for your retirement planning! appeared first on The Twelfth Magpie.

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HSBC Holdings is an advertising partner of Motley Fool Money. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

When it comes to passive income, most people could learn a thing or ten from billionaire investor Warren Buffett. Buying shares on behalf of his investment vehicle Berkshire Hathaway over decades, he set up passive income streams that now earn the business billions of dollars a year.

In fact, converting the gains to GBP, Berkshire earns over £100 a second in passive income from dividends alone.

So even someone with just a few hundred pounds to spare can draw some inspiration when it comes to earning passive income.

Taking the long view

For example, I said Buffett built those dividend streams over the course of decades. Choosing to take a long-term approach to investing can pay off handsomely.

Say, for example, a share has a dividend yield of 5% and the investor chooses to reinvest (compound) it rather than taking it out as cash.

Compounding £250 at 5% annually, it should be worth over £400 after a decade and around £678 after 20 years. This approach has worked even better in some cases for Buffett, as shares he bought like Coca-Cola have increased their dividend annually for decades.

At any point, the investor could choose to stop compounding and draw any dividends as cash.

Focus on future free cash flows

When looking for shares to buy, investors sometimes focus on profits or how popular the business is. Those factors can play a role. Buffet typically focuses on profitable not loss-making businesses, while a business’s popularity, thanks to things like its brand or proprietary technology, can help give it a competitive advantage.

Buffett calls that a “moat” (it helps repel rivals) and his investment in Apple is an example of both factors at play.

But earnings are an accounting concept. They can include non-cash items. So when it comes to funding dividends, they are not necessarily a reliable guide to how a company might support its dividend.

By contrast, a company’s accounts provide a detailed breakdown of its cash flows. They show the hard, cold cash coming in and going out of the door. That matters when it comes to funding dividends.

It is important not just to assess current free cash flows, but also what they might look like in future. After all, dividends are never guaranteed to last.

Buy into brilliant businesses

Some companies can support a strong dividend for a while but have ropier long-term prospects.

One share I think investors should consider for its long-term passive income potential is ME Group (LSE: MEGP).

From Photo-Me booths to orange juice machines and garage forecourt laundrettes, the multinational company’s focus on vending machines is highly cash generative. It helps support a dividend yield that stands at 5.7%.

Not only that, but the current share price is just 10 times earnings. I see that as an attractive valuation.

Its huge network of vending machines gives the FTSE 250 company a competitive advantage. For a rival to set up an equivalent network would be prohibitively expensive. And that gives it a substantial moat.

Still, with fewer shoppers visiting high streets, there is a risk that physical vending machines could decline in usage over time. From a long-term perspective though, I like the proven business model and cash generation prospects.

The post Here’s how Warren Buffett built multi-billion-dollar passive income streams appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. 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.

I understand why some investors are drawn to luxury carmaker Aston Martin Lagonda (LSE: AML). While James Bond’s traditional car of choice may command a six-figure price tag, the Aston Martin share price is in pennies.

That can seem surprising.

Aston Martin has a highly desirable product that it makes in limited quantities, meaning it can sell it for a pretty penny. The firm also benefits from a customer base with the lucrative combination (for Aston Martin) of deep pockets and a deep attachment to the brand.

So, could that propel the Aston Martin share price back to £1 or higher in future? Given that that would be more than double today’s price, ought I to consider investing?

Business, business model, and value are three different things

Answering that question, I think it is helpful to differentiate between a few different things that some investors sometimes do not bother to separate.

One is the basics of the business. Does Aston Martin have the potential to do well?

Absolutely.

From its storied history to its distinctive styling and skilled workforce, Aston Martin’s business of flogging pricey cars to wealthy customers could potentially be very lucrative.

But just because a business has the potential to be lucrative does not necessarily mean that it will. This is where the concept of a business model is important.

While Aston Martin has the potential to be a good business, since its stock market listing in 2018 it has not yet proven that it has a business model that works.

Its most recent quarter demonstrates the problem.

The company grew revenues 16% year on year to £270m. But its pre-tax loss still came in at £66m. Over the long term, that is not a sustainable business model.

This share might not be cheap despite its price

Even if Aston Martin can fix its business model – and for now I think that remains a big if, given its consistently disappointing performance since coming to market – that does not necessarily mean its share price is a bargain.

Funding those ongoing losses has been costly. The company has net debt of £1.5bn. It needs to pay interest on its borrowings, a lot of it at high rates.

Sooner or later it will also need to repay the principal or find some other way of retiring the debt (for example, swapping it for shares, which would further dilute existing shareholders).

That, I think, helps explain why the Aston Martin share price has plummeted 93% in five years.

Investors are not persuaded that it can make money over the long run – and even if it does, the debt burden is a significant challenge.

I’m not touching this

If things do not improve, I think the Aston Martin share price could ultimately hit zero. No matter how cheap a share may look, it can always get cheaper.

Conversely, Aston Martin is not now priced for success. Sales revenues are growing and the company expects “further financial improvement” over the course of this year.

If it delivers on that, proves its business model, and substantially reduces debt, the current share price may yet be a steal.

The risks are too high for me, though, and I will not be investing any time soon.

The post With the Aston Martin share price in pennies, is it in bargain territory? appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

C 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.

I happily own a number of high-yield share, earning passive income in the form of dividends.

But, like any shares, high-yield ones carry some risks. Dividends are never guaranteed, after all, and sometimes a high yield can signal City doubts that the shareholder payout will turn out to be sustainable.

FTSE 100: large companies, but still no guarantees

Is there safety in scale?

Some tiny company with a high yield may seem to be risky, but what about a giant like Shell or Vodafone?

The reality is that although the FTSE 100 index contains the nation’s largest listed companies by market capitalisation, that is no guarantee that they will do well or maintain their dividend.

Shell and Vodafone are growing their dividends currently, but both have cut them within the past decade – alongside lots of other FTSE 100 firms.

Still, FTSE 100 firms pay out huge amounts of dividends in total – well over £1bn per week in the first quarter of 2026, in fact.  

The index contains some very successful, proven businesses. Not all of them will keep doing well but many will. That could involve them paying out some attractive dividends.

Five high-yield FTSE shares

For example, consider the five highest-yielding shares in the FTSE 100 at the moment.

Legal & General yields 8.6%, Standard Life (LSE: SDLF) 7.3%, Land Securities 6.9%, M&G 6.8%, and Barratt Redrow 6.7%.

At a time when the index overall yields 3.1%, that means that those high-yield shares are all more than twice as lucrative as the FTSE 100.

But will those dividends last?

Housebuilding is suffering from weakening demand in some parts of the market. Barratt Redrow has cut its dividend already this year – and that could be a sign of worse to come, depending on what happens to the housing market.

A serial dividend-raiser

Standard Life faces risks of its own. Its large base of assets includes a mortgage book that, if the property market does decline, could need to have its value written down. That is a risk to earnings.

But the company has a lot of strengths too.

Its long-term savings and retirement business counts around one in five UK adults as a customer. Strong, long-established brands combined with deep financial markets expertise help to establish credibility to attract new clients and retain existing ones.

The retirement-focussed financial services space strikes me as an attractive one to be in (Legal & General is squarely focussed on it too). Demand is large and can involve big sums. It is also likely to be resilient over the long run.

Standard Life’s high dividend yield grabs my attention. So too does its goal of raising the dividend per share each year.

It has managed to do that in recent  years and, while there are no guarantees, I believe it could potentially keep doing so. I see it as a share worth considering for investors seeking passive income.

The post What are the FTSE’s most lucrative high-yield shares? appeared first on The Twelfth Magpie.

More reading

• How do these FTSE 100 stocks keep paying brilliant dividends?
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Barratt Redrow, LondonMetric Property Plc, M&g Plc, and Vodafone Group Public. 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.

There has been uncertainty in recent years about what will happen to ISA allowances. Some investors have been eyeing other potential investment vehicles for their money, including Self-Invested Personal Pensions (SIPPs).

Sometimes though, there may seem to be no rush even to consider a SIPP. Retirement can seem a long way off for many of us and pensions often never seem to have much urgency.

But a SIPP can offer an investor benefits – and those can be more substantial over the course of time.

SIPPs have a significant advantage compared to ISAs

There are some things I like about my Stocks and Shares ISA over my SIPP. For example, unlike a SIPP, before reaching 55, I can take money out at any time.

Also any capital gains and income inside the ISA are tax-free, whereas a SIPP is more complicated. There is a tax-free drawdown allowance from 55 onwards, but apart from that the contents could be subject to tax.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

So, why do I bother with a SIPP? One big advantage is tax relief.

In layman’s terms, that means that for every £80 an ordinary rate income tax payer puts into their SIPP, the Exchequer gives them another £20. So they will then have £100 to invest.

For higher and additional rate income tax payers, the financial benefits can be even greater, thanks to more generous levels of tax relief.

Twenty pounds in my example might not sound like much. But that could instead be, for example, a free £20k on an £80k investment. That is enough to get many investors to sit up and pay attention!

Compounding’s a powerful wealth-building technique

We do not know how long that tax benefit may last. Apart from that though, what is the rush? In short, taking a long-term approach to investing allows money more time to grow – something it may do, thanks to the power of compounding.

Say someone invests £80k in a SIPP today which, thanks to tax relief, will be rounded up to £100k. By compounding that at 5% for 15 years, they could more than double their SIPP value to almost £208k.

But if they did that for just 10 years longer, the SIPP ought to be worth far more: some £338k. Adding more years of investing once retired is tough. So it is easier to aim for the same effect, by starting the SIPP investment much sooner!

One potential income and growth opportunity

One share I think SIPP investors should consider for its long-term prospects is consumer goods firm Reckitt Benckiser (LSE: RKT). The 4.6% dividend yield is already attractive, as it sits well above the FTSE 100 average.

But I also believe the Reckitt share price has long-term growth potential given that it currently trades on a lowly 10 times earnings.

Why is Reckitt priced like that? It has had legal problems around product liability in recent years and they may continue. The Middle East conflict threatens to add ingredient inflation and costlier shipping rates to the company’s woes, eating into profit margins.

As a long-term investor though, I feel chipper about Reckitt’s future potential. Its stable of long-established brands such as Dettol and Harpic give it pricing power. Hopefully, that will help it keep making sizeable profits.

The post Why bother with a SIPP now rather than wait 10 years? appeared first on The Twelfth Magpie.

More reading

• £503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years
• £1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years
• Down 47%, is this growth stock finally worth buying in May?
• 2 REITs yielding 7%+ to consider for passive income in 2026
• Just 97 shares of this UK dividend stock generate £238 in passive income

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser Group Plc. 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.

How large a stock market portfolio does someone need if they seriously want to try and aim for a million? There is more than one school of thought on the topic.

Some people – perhaps from hope rather than experience – have the idea that if they invested a small amount in each of 50, 100 or even more shares, they might strike it lucky.

The idea of getting in early on the next Nvidia or Filtronic can set people’s minds (and calculators) racing when it comes to building serious wealth. But I think a different approach could offer more a less scattershot chance of success.

Investing, not gambling

Of course, if I had bought Nvidia shares early in their journey, I doubt I would now be complaining!

But I am an investor, not a gambler. To my mind, putting money into dozens or even hundreds of different shares in the hope that one or two them strike it big seems more like gambling.

After all, with such a large portfolio, how could I possibly hope to get to know the ins and outs of individual companies and assess their prospects?

While one or two shares could do well – perhaps even spectacularly well – there would likely be a fair number of duds in this approach of trying to cover the waterfront.

Zooming in on shares with brilliant prospects

That is why I think the smart way for someone to aim for a million is to do less, not more.

This can be illustrated quite simply. Over the past five years, the FTSE 100 index of leading British shares has risen 43%. But someone who bought only the best-performing 20 would have recorded an even stronger performance.

Someone who only bought the top five would have done even better.

Setting realistic goals

Of course, it is important to be a realistic investor not a daydreamer. Even with a brilliant return, someone who wants to aim for a million has a far quicker chance of success if they start with, say, £200k than if they start with £1k. I say “start with”, but that could be money they drip feed in over time.

But there is another big challenge here. Looking back over the past five years with the benefit of hindsight, anyone can see what shares did brilliantly.

But looking forward – as we must as investors – deciding what shares look most promising is a question of informed judgement, not fact.

Hunting for the right indicators

I am hanging on to my Bunzl (LSE: BNZL) shares because I hope they can do very well in the coming five years, whereas in the past five Bunzl’s share price gain of 2% lags far behind the FTSE 100.

There will be challenges. Inflation eating into profit margins is one, due to Bunzl’s complex global supply chain and the role of petrochemicals in producing some of its catering disposables like cutlery. High oil prices could hurt.

But the company has honed its business model over decades (and grown its dividend per share each year for decades too).

It benefits from a large customer base with regular needs for items from loo rolls to food trays. It has substantial economies of scale and aims to keep growing.

The post Here’s how someone could aim for a million with a handful of shares! appeared first on The Twelfth Magpie.

More reading

• Here’s the dividend yield I get from my Stocks and Shares ISA

C Ruane has positions in Bunzl Plc. The Motley Fool UK has recommended Bunzl Plc, Filtronic Plc, and Nvidia. 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.

What’s your favourite passive income idea? While some people may dabble with dropshipping or setting up an online business, for many the passive income idea that actually earns them money is an old one: owning shares that pay dividends.

That can be a lucrative approach to generating money without having to work hard for it. To illustrate, let’s imagine somebody has a spare £5k they want to invest.

Choosing a suitable investment vehicle

The first step will be putting that money somewhere it can be used to buy and hold shares that hopefully will earn dividends. That may be a share-dealing account, Stocks and Shares ISA or trading app, for example.

Lots of different options exists and different investors have different priorities, so it is important to take some time and compare choices.

Buying a diversified range of blue-chip shares

The money can then be put inside the vehicle. Once the investor feels confident that they understand at least basics of stock market investing such as how to value shares and what allows a company to fund dividends, they can start to buy dividend shares.

Even the best companies could run into difficulties. A simple way to reduce the risk if one share does that is to diversify across a few different choices and £5k is ample for that.

As dividends are never guaranteed to last, it is important to look carefully at companies and consider not only their current business performance but also their future prospects, as well as how accurately today’s share price reflects that.

My own focus tends to be on investing in proven companies that have shown their business model works. Lots of blue-chip shares that make profits and pay dividends can provide a fertile hunting ground.

Earning the income

How much £5k might generate in passive income depends both the dividend yield and timeframe. Yield is what the shares pay annually in dividends, expressed as a percentage of their purchase price.

Currently the FTSE 100 yields around 3% but I think a 6% yield is an achievable target in the current market. On £5k, that would mean some £300 a year of passive income.

But an investor might decide to reinvest dividends. This is known as compounding and can be a financial force multiplier. Compounding £5k at 6% for 10 years, for example, it would grow large enough to earn around £537 of passive income each year.

Or, if someone was willing to wait for 20 years before drawing down the dividends, compounding could help them reach a point where they earn £962 of passive income annually.

One income share to consider

I think a dividend share investors should consider is M&G (LSE: MNG). The FTSE 100 asset manager aims to raise its dividend per share annually. That is not guaranteed, but M&G has managed in recent years. It yields an attractive 6.8% right now.

There are risks. With millions of customers spread across multiple markets, M&G could see some pulling out funds amid market choppiness like we are seeing this year. That could hurt profits – and perhaps dividends.

But I see that large customer base as an asset. The company has a strong brand and deep asset management expertise. It is also a proven cash generator. That bodes well for future dividends.

The post Here’s how much passive income £5k invested this month could earn in years to come appeared first on The Twelfth Magpie.

More reading

• Why this 6.8% high yielder is now my favourite UK passive income and growth stock
• 9 dividend-paying FTSE 100 shares to target a huge ISA retirement income!
• Some pros and cons of buying dividend shares for passive income

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. 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.