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There are many different ways to try to earn additional income.
One I use, along with millions of other people, is to invest in blue chip stocks that I hope can generate dividends. Dividends are payments that a company may decide to make to shareholders when it generates additional cash.
If I invested the right way, I think I could earn £8 a year for the rest of my life for every £100 I invest today. So if you invested £50,000 now, for example, you could receive £4,000 in dividends.
Here is how.
Understanding dividends
One important thing to understand is that companies can decide whether or not to pay dividends.
They may not make enough extra money to do so. But even if they do, they may decide not to. This is true no matter how golden its dividend payment history may appear.
Earning £8 a year for every £100 invested suggests you would need to earn a dividend yield of 8%.
This is more than double the average currently offered by blue-chip companies. FTSE 100 companies in which I would seek to invest. A higher yield can sometimes (but not always) indicate high risk.
To counter that, as I aim for my 8% goal, I would do two things. First, I would focus on finding high-quality companies trading at attractive prices. Secondly, I wouldn't put all my eggs in one basket. Rather, I would diversify into a variety of businesses.
Aiming for an average return of 8%
Although this is notably above the average return of the FTSE 100, I believe 8% is achievable in today's market.
Generally speaking, some developing industries with high growth prospects tend to have lower dividends. Mature industries such as tobacco and financial services offer higher payouts.
So I believe that, with additional income from dividends as my goal, I can realistically expect to reach my 8% target while maintaining profitable companies with proven business models.
A dividend stock I own
As an example, consider one of the stocks I currently own: British American Tobacco (LSE: BATS).
The company owns premium cigarette brands including Stroke of luck. Cigarette consumption is declining in many markets and, in fact, I see this as a key risk for the company. For now, however, cigarettes remain big business and a huge cash generator.
On top of that, British American Tobacco is trying to proactively prepare for an uncertain future by aggressively growing its non-cigarette business.
It has increased its dividend annually for more than 20 years. This is not guaranteed to continue, but the stock is currently yielding 9.4%, well above my target of 8%.
If I build a sufficiently diversified portfolio of the right stocks, I could hopefully use the money today to establish additional income streams that continue for the rest of my life, if I hold the stocks.
