How to generate passive income with dividend shares: a guide for beginners

For many, passive income is that elusive dream that seems to exist only in fairy tales. However, you don't need to be like that! A popular and reliable way to achieve this is through dividend actions. By investing in companies that regularly distribute profits to shareholders, a stable and unlike income flow is in sight.

This guide details why the investment in dividends can be an excellent way to start obtaining income in the stock market.

<h2 class="wp-block-heading" id="h-why-dividend-stocks-are-great-for-passive-income”>Why dividend shares are excellent for passive income

Many companies in the United Kingdom pay part of their profits to shareholders, known as dividends. Here are why they are an excellent option for passive income:

• Unlike capital gains, dividends provide income without the need to sell anything.
• Reinverting dividends helps investment to grow, thus increasing future payments (the effect of the snowball).
• The actions that pay dividends tend to be more stable, which makes them attractive for long -term investors.
• Many companies increase dividends over time, helping to retain purchasing power.

<h2 class="wp-block-heading" id="h-how-to-choose-the-best-dividend-stocks“>How to choose the best dividend shares

Dividends are never guaranteed, so it is important to choose reliable actions. Here are key factors to consider when choosing the best.

• Dividend yield: yield is the percentage of the price of shares paid annually. While high yields are tempting, extremely high performance may indicate financial problems. A yield between 4% and 7% is often an ideal point.

• History of dividend growth: Ideally, look for companies with a long history of growing dividends. I always look for a minimum of 10 years of consistent growth.

• Payment ratio: The payment relationship measures how well a company can be allowed to cover its dividend payments. A 100% proportion means that it is spending all its effective spare of dividends, which is not sustainable for a long time. Ideally, I point to the shares with a payment relationship below 70%.

• Financial strength: strong companies with constant income, manageable debt and good profit margins are more likely to maintain and increase dividends. Always check the balance sheet and consult the latest annual report to have an idea of ​​the stability of a company.

Example of a high performance dividend stock

Let's apply the points prior to a popular Ftse 100 dividend stock.

LondonMetric Property (LSE: LMP) is a real estate investment trust in the United Kingdom (Reit), which means that it must distribute at least 90% of its profits to shareholders. This structure makes it a reliable dividend payer, ideal for passive income applicants.

Keep in mind that tax treatment depends on the individual circumstances of each client and may be subject to changes in the future. The content in this article is provided only for information purposes. It is not intended to be, it does not constitute any form of fiscal advice.

It is also good for beginners, since your business model is simple: it generates income by renting properties and most profits pass to shareholders.

However, the reit depend on interest rates, which can affect the costs of loans and property valuations. Economic recessions can also limit the demand for logistics properties, curb income for rent and harmful profits. Such risks should always be factorized.

Its typically dividend yield fluctuates between 4% and 6%, a good range for a portfolio centered on income. To match inflation, its dividend has increased at a rate of 5.27% in the last 10 years.

Make sleep a reality

The construction of passive income with dividend shares is a popular method that helped many investors to build long -term wealth. When selecting quality dividends actions, reinvesting payments and maintaining a long -term mentality, a reliable income flow can be achieved.

Whether to point to additional income in retirement or a way of complementing profits, dividend investment is a strategy that is worth considering.