With a bit of spare cash to hand, I think it is possible to set up passive income streams by investing in dividend shares. It is an approach I like as it allows me to benefit from the hard work and success of big companies listed on the stock market.
If I had £300 and decided to use it to start building passive income streams today, here are two shares I would buy.
Direct Line
Insurer and financial services company Direct Line (LSE: DLG) is a household name. Thanks to its red telephone logo and extensive advertising, it has built a powerful presence in the minds of millions of people. That is good from a business perspective because it reduces the need to spend vast sums building a customer base.
Insurance is often a lucrative industry. There can be surprises though. For example, one risk at the moment to insurers like Direct Line is that increasing second hand car prices will hurt profits. But typically, the economics of insurance are attractive and and straightforward. People have to insure their vehicles and most insure their homes, so there is a constant stream of revenue. Insurers like Direct Line have sophisticated models to estimate how much they will need to pay out in claims, so they can typically make a healthy profit.
At Direct Line that also makes for a juicy yield. Currently, the firm’s dividend yield is 7.4%. So if I invested a spare £150 into it, I would hope for around £11.10 a year in passive income.
Imperial Brands
I would invest the other £150 into tobacco manufacturer Imperial Brands (LSE: IMB). Its portfolio includes well-known names like John Player Special and Lambert & Butler. Thanks to this premium portfolio, the company has pricing power. That enables it to raise prices to help offset the impact of inflation or a fall in the number of cigarette smokers.
Such falling numbers remain a big risk for the company though. It is currently focussed on increasing its market share in a handful of cigarette markets. That buys it time while cigarette demand declines in many markets. But in the long term, it may need to spend more heavily on newer formats like smoking alternatives.
Meanwhile the company continues to generate huge sums in free cash flow. That funds a dividend yield of 8%. By putting £150 into Imperial today, I would therefore hope to generate £12 a year in dividends.
Making a move on passive income
Simply thinking about buying shares will not earn me any money. But if I move to action and split £300 evenly across Direct Line and Imperial Brands, I would hopefully start earning around £23 a year in passive income for doing nothing.
Dividends are never guaranteed, so they could be cut if a business runs into difficulties. That is why I would spread the money across two shares rather than put it all in one.
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Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.
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