How I’d invest £3,000 in dividend shares to target £250 in annual income

Buying shares in successful companies that pay dividends can be a great way to earn extra income. Here’s how I would take advantage of the recent stock market turmoil to invest £3,000, with the aim of making a profit of £250 a year.

why now?

In recent days, the prices of several major blue-chip stocks have fallen.

When a company pays dividends, because the stock price goes down, the dividend yield goes up. The average yield of the shares I buy is what determines how much money I should receive each year if I invest £3,000.

Now, some results seem interesting to me. But I never buy a dividend stock just because of the yield. I aim to buy a quality business that sells at an attractive price. In today’s market, although some attractive returns are offered, I think it can be difficult to know what the prospects are for some businesses. So, I’m going to focus on companies that I think can continue to grow, even if the economy gets worse.

Dividend and income sharing

Many investors are trying to decide whether growth or income stocks better suit their goals.

The separation is not always clear though. A rich company Diageo and DCC has income and growth prospects, in my view.

Some companies look to me like they have limited long-term growth potential. By plowing through a lot of free cash flow to pay dividends, the company could make a good income option for my portfolio.

Find stocks to buy

An example of such a company is British American Tobacco. Their pricing power and move into non-tobacco product lines means the company can continue to grow, but I see the core tobacco market as a long-term decline.

For me, the appeal of this stock is mainly the income prospects. I think the company can generate strong free cash flow for decades. The dividend yield is 7.5%. I also have a US rival apartwith a yield of 8.2%.

I’m cautious about bank stocks at the moment, but I think that asset management and insurance companies will do well in the aggregate on average over the long term, even if some are undervalued. M&G offers a yield of 11%, Legal & General offers 8.5% and Abrdn was at 7.2%.

To reach my target of £250 per year from an investment of £3,000, I need to achieve an average return of around 8.3%. It is an average, so I can buy some stocks with a lower yield if other stocks raise the average to what I want.

Whatever dividend stocks I choose, as always, I will diversify across companies and business sectors. So £3,000 is enough to do that, put £500 into each of six different registered businesses, for example.

Buy-and-hold

With a clear income goal, I would take a buy-and-hold approach.

I occasionally check to see if something has happened that might change my investment thesis about the company. For example, can changes in profits threaten dividends? Has the long-term outlook for customer demand changed dramatically?

Additionally, I’d be happy to let a portfolio of carefully selected blue-chip dividend stocks hopefully generate passive income on an ongoing basis.