Investing in shares is a common way to earn some extra income. But how much could I actually hope to make by putting money aside regularly to invest in the stock market?
What drives stock market returns
If I buy shares, I could earn money in one of two ways.
The first is a movement in the share price. For example, if I buy a share that costs £1 and it moves to £2, I would double my money. But that only happens if I sell the shares. If I hold on to them, the changing price is a paper gain but I would not yet have made money.
A second way to earn money from shares can pay me even as I continue to own them. Such payments are known as dividends. These are basically a distribution made by a company to shareholders. Such dividends are never guaranteed, but a company that routinely generates enough excess cash is often in a strong position to pay dividends if it chooses to do so.
If extra income is my objective, therefore, I would focus my investing on dividend shares.
Likely returns
If I put £30 weekly into shares, how much dividend income might I earn?
The answer depends on what is known as dividend yield. As an example, the current yield for Tesco stock is 4.1%. That means that if I spent £100 on Tesco shares today I would hopefully earn £4.10 in dividends in the coming year.
£30 a week adds up to £1,560 over the course of a year. At a 4.1% yield, that would generate £64 for me in dividends next year.
But what if Tesco did not pay dividends? It has cut its payout before and could do so again. Indeed, so could any company.
I would mitigate such a risk by diversifying my portfolio across a range of businesses. Crucially I would focus on investing in what I think are great businesses with attractive share prices.
Building income streams
As extra income goes, £64 a year would be welcome but it would not make a dramatic change to my lifestyle.
Yet I could boost that income in a couple of ways.
One would be achieving a higher yield than the 4.1% of my example. I invest first and foremost based on the quality of the business and its valuation. Yield alone does not make me buy a share. However, I do own some shares paying out well above 4.1% (British American Tobacco and M&G are examples) and that I still consider as meeting my investment criteria.
I could also aim to boost my extra income simply by sticking with my plan.
Over time, the weekly £30 would add up. In the second year, for example, not only could I be earning dividends from newly purchased shares – hopefully I would also be receiving payments from shares I bought in the prior year.
With such a long-term approach to investing, as the years go by my extra income could start piling up.
The post How much extra income could I earn investing £30 a week in shares? appeared first on The Motley Fool UK.
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C Ruane has positions in British American Tobacco P.l.c. and M&g Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., M&g Plc, and Tesco Plc. 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.