Earning a bit of extra income could help with everything from paying an unexpected expense to saving up for a holiday. But how to do it without squeezing more hours into the working week?
One way I (and millions of other people) use is buying shares in the hope that I will be paid cash simply by owning them. That sort of payment is known as a dividend, I think dividends could end up generating sizeable extra income for me down the line.
I do not need savings to do that and could get going with just a few spare pounds each day. As an example, here is how I would go about trying to earn almost £900 each month in dividend income by putting aside £5 per day.
The long-term approach
First, I think it is important to be realistic about what to expect. £5 a day adds up to £1,825 per year (with an extra fiver this year as this month is a leap month!)
But… £890 per month adds up to £10,680 of extra income per year. That is more than five times the yearly saving from £5 each day!
How on earth could I hope to generate such a return? The answer is: long-term investing.
I would save the money regularly for years to come. Initially, I would also reinvest the dividends, to help me buy more shares on top of those I could afford from my £5 each day. That is known as compounding and could help me reach my goal more quickly.
The role of yield
Still, it will be a long-term endeavour.
Imagine I could earn an 8% compound return per year on my investments. If I put £5 a day into a share-dealing account or Stocks and Shares ISA and compound my gains at 8% annually, I will be able to generate my £890 monthly extra income within 25 years.
Is an 8% annual return feasible?
I think it could be. That could be made up of dividends, capital gain due to share price growth, or both.
But what is important is buying the right shares. I would not invest in a share just because it had a high dividend yield. Dividends are never assured. Instead, I would focus on finding the sort of businesses I though had excellent commercial prospects over the long term and attractive valuations today.
An example I would happily buy if I had spare cash to invest is Legal & General (LSE: LGEN). It is yielding 7.8% right now.
I would diversify my holdings over a number of different such shares.
Finding shares to buy
Why would I buy Legal & General?
It ticks a number of boxes for me. It operates in markets I expect to have large, enduring customer demand. The FTSE 100 firm has a long history, well-known brand, and deep financial markets expertise.
Owning Legal & General shares in the past has not been all smooth sailing. The company cut its dividend after the financial crisis in 2008. I see a risk the same could happen if another financial crisis hurts investment returns and demand for Legal & General’s products.
As a long-term investor, though, I believe that owning shares like Legal & General could help me build meaningful extra income streams.
The post With a spare £5 a day, I’d target £890 in extra income each month like this appeared first on The Motley Fool UK.
We think earning passive income has never been easier
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Get your free passive income stock pick
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Here’s how I’d aim to turn £10,000 of savings into £14,136 of passive income!
£12,000 of savings? Here’s how I’d aim to turn that into passive income of £30,000 a year
£15,000 invested in these cheap dividend shares could make me £1,185 in passive income!
I think these 2 dividend shares look dirt cheap
2 shares to buy in February for dividend yields topping 7%
C Ruane has no position in any of the shares mentioned. 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.
