I’d target £800 a month in extra income by spending £100 a week on shares

From bills to treatment, a bit more money can often be useful. One of the ways I try to get some extra income is by trickle-feeding money into shares that I hope will pay me dividends in the future.

That allowed me to benefit from the commercial power of some of the biggest businesses in the country. I also like the fact that I can invest at my own pace and do not need a large amount up front.

Here’s how I’d build that portfolio from scratch, to aim for £800 a month with average dividend income.

How dividends work

The theory behind this approach is quite simple. Using the money I saved, I was able to buy shares in the company. That is effectively a small share in a company listed on the stock market, like shell or Tesco.

Sometimes, companies pay out some or all of their profits to shareholders in the form of dividends. As long as I hold the stock, I will receive whatever dividends the company pays.

Proceeds from dividends in Shell Co., Ltd. is 3.6%. So for every £100 I put into Shell shares today, I expect to receive £3.60 in annual dividends.

future uncertainty

However, that may not be the case. Challenging business conditions could lead Shell to cut its dividend, as it did in 2020 (and Tesco in 2014). Then again, it could be the other way around and the company will increase its dividend.

I try to manage this uncertainty in some way. One is diversification in various stocks. Another one – which is central to my approach as a long-term investor – focuses on what I see as high-quality trading businesses at attractive prices.

Find stocks to buy

I don’t think it’s hard to find a good business. But it can be difficult to find at an attractive price.

For example, I’m thinking of making a tool Scientific Jury this is a solid business. It has a track record of strong annual dividend increases. But other investors like Judges, let it trade at a price-to-earnings ratio of 59, with a yield of just 0.8%.

That rate of return is not going to help me create an extra income stream very quickly.

Create a portfolio

So as well as hunting for shares in big businesses that sell at attractive prices, I also look for strong results.

This can be a gradual process. Putting money aside every week doesn’t mean I have to invest it right away. I can patiently wait for high quality stocks to trade at what I see as attractive prices.

Doing so over time, dividends will hopefully increase. If I can get an average dividend yield of 5%, then saving £100 a week means I’ve got my target of £800 in extra income every month after 37 years.

I hope to make a profit in year one and continue to do so year after year. It took me decades to reach my goals, but I was able to make a profit as I went along.