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The prospect of increasing income appeals to many people. What may be less appealing is the work that normally comes with it. That’s why my favorite approach to trying to supplement my finances with extra income is to invest in dividend-paying stocks.
This approach can work with a small amount of money – and have lasting benefits. Here I explain some key points of my plan.
The principle of dividends is not complicated. Businesses conduct their business to try to make a profit. If they are successful, they may have to use some of those profits for things like building new factories, investing in expensive product development, or paying off loans.
But if there is money left over, the company can choose to pay it out to shareholders. This is called a dividend. These dividends are never guaranteed. But some companies have been paying them every year for decades. For example, not only has Scottish Mortgage Investment Trust has been paying a dividend for decades, it has also not reduced the amount of its annual payment since before the war.
Invest in stocks
So how could I get some of those dividends to give me extra income? To receive a dividend, an investor must hold at least one share of the company paying it.
But since dividends are never guaranteed and there is also a risk of capital loss if the stock price goes down, I would never invest my money in just one company, no matter how bright its prospects. Instead, I would build a diversified portfolio of stocks in a variety of industries.
It takes money and that’s where the £30 a week comes in. That might not seem like much in a stock market that sees billions of pounds of shares traded daily. But, over time, £30 a week would add up. That would give me over £1,500 a year to invest.
To try to stick to my plan, I would set an achievable goal. This £30 works for me, but other people can invest more or less. I would also set up a stock trading account, or Stocks and Shares ISA, to give me the convenient ability to buy stocks.
Find stocks to buy
What stocks would I buy? I was looking for companies that I believed had a competitive advantage in an industry that I believed would benefit from sustained customer demand.
But the price I pay matters as much as what I buy. So I would look to buy stocks that are trading at an attractive price. Price also helps determine a stock’s dividend yield – essentially its annual dividend expressed as a percentage of my cost for the stock.
If I buy stocks that continue to pay dividends and hold them for the long term, I could earn extra income year after year. If the average return on my portfolio is 5%, for example, I should expect to earn £78 in extra income each year during my first 12 months of investing. Over time, if I continue to invest and the companies I own maintain their dividends, I should see my income increase.