Stock market

I will make extra income with £3 per day this way.

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Some extra income can always come in handy! But earning more doesn’t always require working harder. Millions of people increase their income by investing in shares, then letting the profits roll in.

One advantage of this approach, in my view, is that it doesn’t have to be expensive. Even with a few extra pounds a day, I could start buying income shares that I hoped would pay me dividends for years, or perhaps decades, to come.

Here’s how I’d plan to do it for just £3 a day.

Small, consistent savings

I will try to get into the habit of saving regularly, fund me and start building a portfolio of dividend shares. £3 a day may not sound like much. But it adds up to around £1,100 a year.

Going forward, I would set up and make regular contributions to a share dealing account, or stocks and shares ISA.

Not all profits are equal.

My plan to earn extra income is based on receiving dividends from shares. But while some stocks pay big dividends, others pay nothing at all. But remember, profit from any share is not guaranteed.

So instead of focusing too much on the current dividend yield (a share’s annual dividend expressed as a percentage of my purchase price), I’ll focus on what I think its long-term What do term dividend prospects look like?

Specifically, I would be looking for businesses that I felt could generate significant free cash flow. I would look for firms that are likely to return dividends to shareholders, rather than use them to invest in expansion.

Finding Shares to Buy

What could be an example? Consider a piece from my portfolio: British American Tobacco (LSE: BATS).

Cigarette consumption is declining in many markets, threatening revenue and profitability. But the demand for tobacco in various forms remains substantial.

Like with its portfolio of premium brands lucky Strike, the business may charge a premium price. But cigarettes are cheap to make, meaning British American profits are substantial.

Even with declining cigarette sales in many markets, I expect. FTSE 100 The manufacturer will continue to generate large free cash flow. It has increased its dividend every year this century and currently yields 10.1%.

Weighing risks and rewards

British American Tobacco’s falling share price (down 25% over the past five years) may suggest that many investors are wary of the risks to its business from declining cigarette sales. I think that is reflected in the price and high production.

I also expect the company to use its assets, including well-known brands and a large sales network, to rapidly increase sales of non-cigarette products.

By owning British American along with other shares in my portfolio, I am generating additional income. That income is growing thanks to annual dividend growth.

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