There are different ways to earn money – and not all of them involve working. One way I try to boost my earnings is by buying income shares.
With some high dividend yields on offer in today’s stock market, I think it is possible to invest £10,000 in income shares and aim for an annual income in four figures that can grow over time. There are always risks, of course, and dividends are never guaranteed. But I think this plan is workable and could succeed. Here is how I would go about it, if I had a spare £10,000 to invest today.
Doing the maths
My four-figure target income is £1,000 per year. So if I have £10,000 to invest, I would need to achieve an average yield of 10% on my portfolio.
As that is an average, not all shares I buy need to have as high a yield as that.
Looking for shares to buy
So would I just hunt for high-yield shares? No. As dividends can be cut, today’s high-yield temptation can be tomorrow’s low-yield regret.
Instead, I look for great companies selling at attractive prices. Then I would consider how the dividend looks.
One reason I think now could be a good market to help me set up passive income streams is that there are some high-quality shares that offer me a yield close to my target. I would want to diversify my £10,000 across a range of shares, to reduce my risk. So I need to find more than one company in which to invest. I would put £2,500 into each of four shares.
High-yield shares
One is insurer Direct Line. It yields 10.6%. Asset manager M&G yields 10.2%. Both face risks from a recession cutting investors’ willingness to invest, hurting profits. But these two firms benefit from strong brands in a resilient sector.
Other income shares I think could help me hit my target include Income and Growth Venture Capital Trust, yielding 10.7%, and 8.9%-yielding Henderson Far East Income. Buying into these would give me the benefit of exposure to a wide range of businesses, as well as offering more geographic spread to my portfolio.
10%+ yield
Those four dividend shares, bought at today’s price, would offer me an average yield of 10.1%. That should earn me around £1,010 in dividends each year.
Four shares offers me some diversification. But if one share cuts its dividend dramatically, or cancels it, I could still see my passive income from the portfolio fall sharply.
Income growth
But how would I try to target a growing income from these shares?
One way is through the opportunity of dividend growth. So far this year, M&G and Henderson Far East Income have both raised their payouts, Direct Line held its interim dividend steady while Income & Growth’s payout is smaller than last year.
A second approach would be to compound the dividends. By putting the dividends back into buying more income shares, I should be able to receive bigger dividend payments in future without needing to add any more capital to my initial £10,000.
This post was originally published on Motley Fool
