The old saying is that money does not grow on trees. If it did, harvesting it would mean it was not really passive income! My own approach to passive income includes buying dividend shares.
That could help me generate free income, in the form of dividends. They could continue and indeed hopefully grow for the rest of my life.
Starting to do that does not even require a lot of money. If I had a spare £1,900 today, here is how I would go about it.
How dividend shares work
I describe dividends as free money because, once I buy a company’s shares, I am entitled to any dividends it pays while I hold them. I do not need to do anything other than buy the shares. I could keep earning such dividends for as long as I hold the shares, which could be the rest of my life (I am a long-term investor, after all).
Dividends are never guaranteed. So I would take time to really dig into shares and research them before buying to decide if they seemed right for me.
I would look for businesses I thought may well have the capacity and intention to pay dividends over the long term. Things like a unique competitive advantage, large target market, and willingness to pay out money to shareholders instead of spending it elsewhere would all be topics to consider when hunting for dividend shares.
Any share can disappoint, though. To protect against that risk, I would diversify my holdings across a variety of shares. With £1,900, I could comfortably invest in a handful of different firms.
An example in practice
I would follow famous investor Warren Buffett and stick to businesses I feel I understand.
An example is the brewer and distiller Diageo (LSE: DGE). Its business model of making and selling drinks is pretty straightforward. It can also be very lucrative, thanks to the company owning premium brands like Guinness.
As Diageo’s first-half results published today (30 January) showed, though a rough economy in some markets is hurting business, the firm is still a profit machine. Operating profit fell 11% compared to the prior-year period, but still comfortably topped $3bn.
Those risks continue and I also think the declining popularity of alcoholic drinks among many young people is a risk to revenues and profits at the business. But if I had spare cash to invest I would be happy to add it to my ISA.
The interim dividend grew 5%. Diageo is a Dividend Aristocrat, after delivering decades of continuous annual dividend increases.
Putting the plan into action
To do this, I would set up a share-dealing account or Stocks and Shares ISA, put the £1,900 in and look for dividend shares to buy.
Diageo yields 2.8%. Investing £1,900 at such a yield would earn me over £50 per year in passive income. But I would aim for a higher average yield (and therefore income) while still sticking to high-quality blue-chip shares.
The post Spending £1,900 on dividend shares today could earn me free money for life. Here’s how! appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo 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.
