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There are lots of different ways to try and earn some extra income.
One that I use, along with millions of other people, is investing in blue-chip shares I hope can pay me dividends. Dividends are payments a firm can decide to make to shareholders when it generates spare cash.
If I invested in the right way, I think I could potentially earn £8 per year every year for the rest of my life for each £100 I invest today. So, if I invested £50,000 now, for example, I could hopefully be receiving £4,000 in dividends.
Here is how.
Understanding dividends
An important thing to understand is that companies can decide whether or not to pay dividends.
They may not generate enough spare cash to do so. But even if they do, they can decide not to. That is true no matter how gold-plated their track record of paying dividends may seem.
To earn £8 per year for each £100 invested suggests I would need to earn a dividend yield of 8%.
That is over double the average currently offered by the blue-chip FTSE 100 firms I would be looking to invest in. A higher yield can sometimes (though not always) signal an elevated risk.
To counter that while aiming for my 8% target, I would do two things. First I would focus on finding high-quality companies trading at attractive prices. Secondly, I would not put all my eggs in one basket. Rather, I would diversify across a range of companies.
Aiming for an 8% average yield
Although it is markedly higher than the average FTSE 100 yield, I think 8% is achievable in today’s market.
Broadly speaking, some developing industries with high growth prospects often have smaller dividends. Mature industries like tobacco and financial services offer higher payouts.
So I think that, with extra income from dividends as my target, I could realistically hope to hit my 8% target while sticking to profitable companies with proven business models.
A dividend share I own
As an example, consider one of the shares I currently own: British American Tobacco (LSE: BATS).
The business owns premium cigarette brands including Lucky Strike. Cigarette consumption is falling in many markets and indeed I see that as a key risk for the company. However, for now cigarettes remain big business – and massively cash generative.
On top of that, British American Tobacco is proactively trying to prepare for an uncertain future by growing its non-cigarette business aggressively.
It has raised its dividend annually for over 20 years. That is not guaranteed to continue, but the shares currently yield 9.4% — well above my 8% target.
If I build a sufficiently diversified portfolio of the right shares, I could hopefully use money today to set up extra income streams that continue for the rest of my life, if I hang onto the shares.
