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.
The post How I’d build a growing four-figure income spending £10,000 on income shares appeared first on The Motley Fool UK.
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C Ruane has positions in M&g Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.