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There are different ways to make money and not all of them involve working for it. Take dividends from income shares as an example. By purchasing proven, profitable blue-chip companies, you could be in a position to share some of the money they pay out to investors.
In practice, things may not be so simple. Dividends are never guaranteed and it can happen that a previously successful company sees its fortunes and then the dividend fall.
Therefore, it is important to decide the approach I will take to building an income share portfolio.
Establish the right investment strategy
I could try to improve my chances of earning the passive income I want by adopting the right investment strategy.
For example, I would spread my funds across a variety of stocks rather than concentrating money on just one or two. £6,900 is enough to do that: you could buy shares in five to ten different companies.
£500 a year on an investment of £6,900 would mean earning a dividend yield of 7.2%. I think that is possible if we stick to the frontline companies. FTSE 100 stocks with solid profitability records.
But I need to make sure I don't let the tail wag the dog. Buying a stock just because it yields 7.2% today does not seem like a smart decision to me.
Instead, I would look for stocks of companies with a strong and defendable position in an industry I hope to endure. Only if I find a business like this and like the stock price Would you consider purchasing it?
At that point, I would start looking at performance.
The FTSE 100 contains several high-performing stocks
The FTSE 100 currently offers a range of high-performing income stocks that I believe meet my buying criteria.
An example is the insurance company. Aviva (LSE: OFF).
Insurance has been big business for centuries, and I don't see that changing in the next few years. People want to protect their valuables against the risk of loss and, in some cases, are even required to do so. If underwriting standards are maintained, it can be a lucrative business.
Aviva has extensive underwriting experience. The company has well-known brands such as Norwich Union. It has also rationalized its business in recent years to focus on its key markets, such as the UK.
That means it could see a larger negative impact on its profits if competition in the UK insurance market leads to lower profit margins.
But I believe the strategy of leveraging its strengths will help the company generate stronger business results in the long term. That could help you maintain or increase the dividend.
Currently the dividend yield is 6.9%. If I had extra money to invest, I would be happy to buy the stock. As part of a diversified selection of income holdings, including some with even higher yields, it could help me reach the 7.2% target I outlined above.
