There are many different ways to earn extra income.

One that I, along with millions of other people, operate is to invest in blue chip stocks that I hope will pay me dividends. Dividends are payments that a company can pay to shareholders when it generates free cash.

I think if I invested the right way, for every £100 I invest today I could potentially earn £8 a year for the rest of my life. So, for example, if I invest £50,000 now, I hope to receive a dividend of £4,000.

Here’s how.

Understanding dividends

Please remember that companies can decide to pay dividends.

They may not generate enough free cash flow to do so. But even if they do, they may choose not to do so. This is true regardless of how gilded their dividend track record may seem.

Earning £8 a year for every £100 invested means I would need to earn a dividend yield of 8%.

This is more than double the average currently offered by blue chips FTSE100 companies I would like to invest in. A higher rate of return can sometimes (but not always) signal increased risk.

To counteract this, in pursuit of the 8% target, I would do two things. I would first focus on finding high quality companies that offer great prices. Secondly, I wouldn’t put all my eggs in one basket. I would rather diversify into different companies.

The target is an average yield of 8%.

While it is clearly higher than the average FTSE 100 yield, I think 8% is achievable in today’s market.

Generally speaking, some emerging industries with high growth prospects often pay smaller dividends. Mature industries such as tobacco and financial services offer higher payouts.

So I think with the goal of additional dividend income, I can realistically hope to hit the 8% target by sticking to profitable companies with proven business models.

The dividend share I own

As an example, consider one of the stocks I currently own: British American tobacco (LSE: BATS).

The company owns premium cigarette brands, including: Fluke. Cigarette consumption is dwindling in many markets, and I actually see this as a key risk for the company. But for now, cigarettes remain massive business and generate huge profits.

Moreover, British American Tobacco is actively trying to prepare for an uncertain future by aggressively expanding its non-cigarette businesses.

It has raised its dividend every year for over 20 years. There’s no guarantee this will happen, but the stock is currently yielding 9.4%, well above my target of 8%.

If I build a sufficiently diversified portfolio of the right stocks, hopefully I could operate the money today to create additional sources of income that will last for the rest of my life if I stick with stocks.