They can buy so-called yield traps, shares that have a high dividend yield today partly because some investors are already anticipating future dividend cuts. Simply chasing yield can be a costly mistake for investors to make. I think the same logic applies to Diversified if energy prices crash. As a housebuilder, Persimmon could suffer from a housing market downturn. Remember, I am trying to focus on how a company will perform in future, not its track record. But that might not be the right thing for me to do. Put like that, it sounds like it would be simplest for me to focus on 10% yielding shares, such as Persimmon or Diversified Energy. That means that I could target £1,000 by spending £100,000 on 1%-yielding shares, or investing a tenth of that amount on shares yielding 10%. So, if I put £100 into a share yielding 1% I would hopefully receive £1 in annual dividends if the yield was 2% it should be £2 and so on. Yield is basically an expression of annual dividends as a percentage of a share’s purchase price. The answer depends on the dividend yield of the shares I buy. If I wanted to target £1,000 each year in passive income, how much would I need to invest in five such companies? If I invest in five different companies and one of them suddenly runs into unexpected difficulties, hopefully that would not affect my passive income streams from the other four.
That is why I would build my portfolio to include a variety of shares and give me exposure to different industries. Indeed, at the end of last year Diageo said that although it expected inflationary pressures to increase, it expects “ organic operating profit to grow sustainably in a range of 6% to 9%” over the next several years.īut what if inflation gets worse? Or a decline in alcohol sales among younger consumers leads to falling revenues? Even the best-run blue-chip business faces lots of risks. Even if cost inflation soars on items like barley and packaging, I think the uniqueness of Guinness would mean Diageo could push its prices up and hopefully still keep customers. I reckon that gives it a unique competitive advantage. For example, the drinks company Diageo owns brands like Johnnie Walker and Guinness. I can think of quite a few blue-chip companies I think have strong business prospects. A healthy balance sheet can help a company fund dividends, but if a firm has heavy debts then profits may need to be used for interest payments instead. A company with some competitive advantage in its business area should find it easier to make profits than a company that has no such advantage. For example, if it operates in a market that is likely to keep seeing strong customer demand, I would regard that as positive.
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There is no way of knowing what will happen to a company in future, but there are some signs I look for as positive indicators. Will it have the ability to make profits that could help fund a dividend? If I am investing today hoping to earn passive income in future, I would want to know what a company’s forward-looking prospects are like. I think the same is true when it comes to dividends. Nor does it help you understand other important factors, like the cost of production. The past production of a gold mine is not in itself an indication of what might come out of the ground in future. The answer is that, without further information, there is no way to know. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today! But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing.
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Inflation is out of control, and people are running scared.