Put some money into dividend shares, then watch the second income grow over time.
As an idea, that sounds simple enough. But translating ideas into practice is not always easy.
So, what about this one?
Big companies earn money – and it’s up for grabs
To start with, it may be helpful to explain why I (like millions of other investors) see dividend shares as an attractive option when it comes to passive income.
The London stock market contains hundreds of companies with proven business models that generate spare cash and distribute at least some of it to shareholders in the form of dividends. Those shareholders do not have to do anything for that money beyond owning the share in question.
Some of those companies are tiddlers, but many are giants of British business, such as Shell, Tesco, and Unilever.
Some people rack their brain trying to come up with novel ways to earn a second income. But this way is already there, hiding in plain sight.
Setting an expectation
How lucrative can it be?
That depends on how much somebody invests and at what average dividend yield.
Yield is basically the amount of dividends someone expects to earn in a year, expressed as a percentage of the cost of the shares. So the current FTSE 100 yield of 3% means that someone spending £100 on FTSE 100 shares today would hopefully earn £3 a year of second income from them.
Put another way, someone spending £100,000 would hopefully earn a £3,000 second income annually.
I say “hopefully” because dividends are never guaranteed. That is one reason a savvy investor diversifies their portfolio and pays close attention when choosing shares to buy.
Though 3% is the FTSE 100 average, in today’s market I think an investor could realistically target a 6% yield while sticking to proven blue-chip firms.
Hundreds of pounds of weekly income
At that level, what would it take to earn a £300 second income on average per week?
That is £15,600 per year. So, at a 6% yield, it would require £260,000.
The good news is that for someone who does not have that (or even a single penny) invested today, it is possible to build up to it.
That could see the second income grow along the way towards the target. Or the investor could reinvest dividends initially, seeking to get to the target portfolio size as fast as possible.
Doing that with £1,000 each month, a portfolio compounding at 6% annually ought to hit £260,000 in under 15 years.
An income share to consider
One dividend share I think merits investors’ consideration is British American Tobacco (LSE: BATS).
A lot of people do not like cigarettes. That explains why some investors shun the FTSE 100 share on ethical grounds.
It also points to a key risk from a business perspective: declining cigarette sales. British American’s revenues have fallen for several years in a row.
Pricing power thanks to a premium brand portfolio could help mitigate that risk. But it is a risk that ultimately may threaten the company’s decades-long track record of annual dividend per share growth.
But while cigarette sales are falling, they remain substantial – and highly profitable. British American Tobacco offers a dividend yield of 4.9%.
Should you invest £5,000 in British American Tobacco P.l.c. right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if British American Tobacco P.l.c. made the list?
Christopher Ruane has no position in any of the shares mentioned.
