I reckon investing in dividend shares is a improbable option to construct a passive earnings stream. In a great world, I’d prefer to take pleasure in this extra earnings later in life, when my bills are decrease, and my children aren’t counting on me anymore.

Let me break down some numbers and a few steps I’d observe.

The plan

The very first thing I must do is select my funding automobile of selection. That is to make sure I maximise my pot of cash. For me, a Shares and Shares ISA is a no brainer, for 2 causes. One is the beneficial tax implications of dividends whereas utilizing this technique, and the opposite is the beneficiant £20K annual allowance.

Please observe that tax remedy will depend on the person circumstances of every shopper and could also be topic to alter in future. The content material on this article is supplied for data functions solely. It isn’t meant to be, neither does it represent, any type of tax recommendation. Readers are liable for finishing up their very own due diligence and for acquiring skilled recommendation earlier than making any funding selections.

Subsequent, I would like to make sure I’m choosing and shopping for the very best shares to obtain probably the most dividends doable. I’d search for Dividend Aristocrats, but additionally keep in mind that the previous isn’t a assure of the longer term. Different facets I’d contemplate embrace reviewing efficiency, a agency’s steadiness sheet, and future outlook.

Now let’s crunch some numbers. If I wished to bag a five-figure further earnings stream by dividend investing, I’d love to have the ability to begin with a lump sum. Let’s say I’ve £10K to kick issues off.

Subsequent, I’d put some cash in every month from my wages — I’ll say £200 monthly. I’m going to observe this plan for 20 years, and intention for an 8% price of return.

After 20 years, I’d be left with £167,072. For me to take pleasure in this, I’d draw down 6% yearly, which equates to only over £10,000 per 12 months.

It will be remiss of me to not point out some potential pitfalls. The most important concern is that dividends are by no means assured. Subsequent, all shares include particular person dangers that might dent earnings and returns. Lastly, if I earn lower than my projected return, I’d be left with much less cash to attract down from.

Which shares ought to I purchase?

If I used to be following this plan as we speak, Aviva (LSE: AV.) is the kind of inventory I’d love to purchase. The multi-line insurance coverage enterprise ticks numerous the packing containers I search for when shopping for shares.

Firstly, a beneficiant dividend yield of over 7% is enticing. For additional context, the FTSE 100 common is nearer to three.6%.

Subsequent, the shares look good worth for cash on a price-to-earnings progress (PEG) ratio of 0.5. Any studying under one can point out worth for cash.

Transferring on, the agency possesses wonderful model energy, and a great monitor report, too. Moreover, lots of its merchandise, together with life and automobile insurance coverage, are the kind of merchandise that I see rising in demand. This might assist develop earnings and returns for years to come back.

Nonetheless, the bear case is that financial turbulence might hamper efficiency and investor payouts. For instance, throughout trickier occasions, shoppers might put much less of a precedence on shopping for non-essential insurance policies similar to life insurance coverage as they cope with increased prices of residing. A smaller concern of mine is the extreme competitors within the sector too.