Stock market

£8 a year in extra income for life, for every £100 invested today? This is how!

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There are many different ways to try and earn some extra income.

One that I use, along with millions of others, is investing in blue-chip shares that I hope can pay me dividends. Dividends are payments that a firm may decide to make to shareholders when it generates excess cash.

If I invest correctly, I believe that the £100 I invest today could potentially earn me £8 a year for the rest of my life. So, if I’ve just invested £50,000, for example, I hope I’m getting a £4,000 dividend.

Here is how.

Understanding profitability

An important thing to understand is that companies can decide whether to pay dividends or not.

They cannot generate enough additional cash to do so. But even if they do, they may decide not to. This is true no matter how gilded their dividend payout track record is.

To earn £8 per year for every £100 invested suggests I would have to earn a dividend of 8%.

This is double the average currently offered by Blue Chip. FTSE 100 Firms in which I want to invest. A high yield can sometimes (though not always) indicate high risk.

To combat this for my 8% goal, I would do two things. First I would focus on finding high quality companies trading at attractive prices. Second, I won’t put all my eggs in one basket. Rather, I would diversify into a range of companies.

8% average yield target

While this is significantly higher than the average FTSE 100 yield, I think 8% is achievable in today’s market.

Generally speaking, some developing industries with high growth potential often have small profits. Mature industries such as tobacco and financial services offer higher payouts.

So I think that, with surplus revenue as my target, I can realistically hope to hit my 8% target and stick to profitable companies with proven business models.

A dividend share that I own.

For example, consider one of the shares I currently own: British American Tobacco (LSE: BATS).

The business also owns premium cigarette brands. lucky Strike. Cigarette consumption is declining in many markets and in fact I see this as a significant risk for the company. However, currently cigarettes are big business – and massive cash generators.

In addition, British American Tobacco is actively preparing for an uncertain future by aggressively expanding its non-cigarette business.

It has increased its profits annually for 20 years. It’s not guaranteed to continue, but the shares are currently yielding 9.4% – well above my 8% target.

If I build a sufficiently diversified portfolio of the right stocks, hopefully if I hang onto stocks I can hopefully use the money today to establish additional streams of income that will last the rest of my life.

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