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From bills to treats, a little more money could often come in handy. One way I try to earn additional income is by putting money into stocks that I hope will pay me dividends in the future.
That allows me to benefit from the business prowess of some of the largest companies in the country. I also like the fact that I can invest at my own pace and don’t need a large initial sum.
This is how I would try to build such a portfolio from scratch, to aim for £800 each month on average in dividend income.
How dividends work
The theory behind this approach is quite simple. Using the money I save, I can buy a share in a company. That’s effectively a small stake in a publicly traded company, such as Shell either Tesco.
Sometimes a company pays out part or all of its earnings to shareholders in the form of dividends. As long as I have your shares, I will receive the dividends that a company pays.
Shell has a dividend yield of 3.6%. So for every £100 I invest in Shell shares now, I’ll hopefully receive £3.60 in annual dividends.
future uncertainty
However, that might not happen. Challenging business conditions could lead Shell to cut its dividend, as it did in 2020 (and Tesco in 2014). On the other hand, perhaps the opposite is true and a company increases its dividend.
I try to handle this uncertainty in various ways. One is to diversify across a range of stocks. Another, which is central to my approach as a long-term investor, focuses on what I see as high-quality companies trading at an attractive price.
Find stocks to buy
I don’t think it’s hard to find great deals. But it can be difficult to find them at an attractive price.
For example, I think instrument maker Scientific Judges it’s a solid business. It has a history of strong annual dividend increases. But other investors like Judges too, which is why it trades with a price-earnings ratio of 59, with a yield of just 0.8%.
That level of performance is not going to help me generate additional streams of income very quickly.
building a portfolio
So in addition to looking for stocks in big companies that are selling at attractive prices, I’m also looking for strong returns.
This can be a gradual process. Setting money aside each week doesn’t mean you have to invest it right away. I can patiently wait for high quality stocks to trade at what I consider to be an attractive price.
Doing that over time, I expect my dividends to add up. If I can achieve an average dividend yield of 5%, then saving £100 each week should mean I will reach my goal of £800 in additional monthly income after 37 years.
Hopefully, you would start earning income in the first year and continue to do so every year. It may take decades to reach my goal, but I can earn dividends along the way as I progress.
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