Here’s how I’d target extra income from investing £50 a month in dividend shares

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Some extra income could come in handy for most people – especially if it did not bring any extra work. One way I try to bring in some more money is by investing in dividend shares. That does not need to take a lot of my time or money.

Here is how I would start using such an approach if I had a budget of £50 each month.

Put aside money regularly

The more I invest, the more income I might be able to generate. But I think the key habit to get into is simply that of saving regularly so one has money to buy shares. If I start with £50, progress will be slower than if I begin by putting aside £100 or £150 every month. But once I am in the habit of saving, hopefully I will stick to it. I can always increase my regular contribution later if I have enough spare money.

Saving £50 a month would add up to £600 in a year. If I invested that in shares with an average dividend yield of 5%, I would hopefully get £30 each year in extra income.

I would put this money into a share-dealing account or Stocks and Shares ISA. In fact, I would set one of these up immediately even if I did not yet have enough money to start buying shares. That way, when I did have sufficient funds, I would be ready to act straight away.

Earning extra income from dividends

Dividends are money a company pays out to its shareholders. Basically the easiest way to think of them is as a tiny slice of the business profits.

A company may not generate enough cash to fund dividends. In other situations, it may make enough money but decide not to pay it out as dividends. These payouts are never guaranteed. So I would look for businesses I expected to generate large profits in future that would be surplus to the company’s own requirements. I would use the money I was saving each month to buy shares in some companies like this, if the price was attractive enough.

As dividends are never guaranteed – and no one knows how well any one company will do in future – I would spread my investment over a diverse range of companies. That should help me lower the risk to my income if one of them starts to do badly.

Finding dividend shares to buy

How would I find such companies? I would first learn a bit about how the stock market works and then look at businesses I felt were within my scope of understanding.

I would hunt for companies I expect to see strong future demand and that enjoy some competitive advantage in serving that demand. For example, I may think that retailers will continue to have a large pool of customers in future. But should I invest in Tesco or B&M, Sainsbury or Ocado? I would look to see whether a company had a competitive edge that I thought could help it make profits in future.

Additionally, I would always check what debt the company had on its balance sheet. Even if a company has high profits, a lot of debt may mean it does not have much scope to pay dividends.