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There are different ways to earn money and not all of them involve working for it. Take the dividends from income shares, for example. By buying into proven, profitable blue-chip businesses, I could be in line to share some of the money they pay out to investors.
In practice, things might not be quite as simple. Dividends are never guaranteed and it can be that a formerly successful business sees its fortunes decline – with the dividend following.
So, deciding the approach I take to building a portfolio of income shares is important.
Setting the right investment strategy
I could try to improve the chance of getting the passive income I want by landing on the right investment strategy.
For example, I would spread my funds across a range of shares rather than concentrating the money in just one or two. £6,900 is ample to do that and I could buy shares of five to 10 different companies with it.
£500 per year from a £6,900 investment would mean earning a 7.2% dividend yield. I think that is possible while sticking to blue-chip FTSE 100 shares with solid records of profitability.
But I need to make sure I do not let the tail wag the dog. Buying a share just because it yields 7.2% today does not strike me as a smart move.
Instead, I would look for shares in companies with a strong, defensible position in an industry I expect to endure. Only if I find such a business and like the share price would I consider buying it.
At that point, I would start looking at the yield.
FTSE 100 contains multiple high-yield shares
Currently, the FTSE 100 offers a range of high-yield income shares I think meet my buying criteria.
An example is insurer Aviva (LSE: AV).
Insurance has been big business for centuries – and I do not see that changing in the coming years. People want to protect their valuables against the risk of loss and in some cases are even obliged to do so. If underwriting standards are maintained, that can be a lucrative business.
Aviva has vast underwriting experience. The company has well-known brands such as Norwich Union. It has also streamlined its business in recent years to focus on its key markets, such as the UK.
That means it could see bigger negative impact on its earnings if competition in the UK insurance market leads to lower profit margins.
But I think the strategy of playing to its strengths will hopefully help the firm deliver stronger long-term business results. That could help it maintain or grow the dividend.
Currently the dividend yield is 6.9%. If I had spare cash to invest, I would be happy to buy. As part of a diversified selection of income shares, including some with even higher yields, it could help me hit the 7.2% target I outlined above.
