Can a few pounds a day really be enough to set up ongoing passive income streams? Our writer thinks so — and explains his approach.
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The idea of earning money regularly without working for it sounds great. In practice, are such passive income streams realistic? I think they can be.
One of the ways I earn passive income is by investing in dividend shares. Unlike some passive income ideas, such an approach can fit my financial situation even if I do not have any money to start with. Here is how I would go about it by putting aside a spare £3 each day.
If you have ever laid a garage floor or building foundation, you may know that even small stones can play a role in setting the groundwork for a large building.
I think it is the same when it comes to setting up passive income streams. Although £3 a day may not sound like much, it adds up. In a year that would give me over £1,000 to invest. But because the daily amount I would need to save is modest, hopefully I could stick with the plan even when other spending priorities reared their heads.
Just saving the money is not enough to start generating passive income streams, though. To do that, I would invest it in a share-dealing account or Stocks and Shares ISA and start buying dividend stocks.
The theory is not complicated. Large companies like Vodafone, BP and Lloyds often make big profits and distribute them to shareholders in the form of dividends. If I buy such shares, I should get any dividends they pay for as long as I own them. That can help to build my passive income streams.
Dividends are never guaranteed, though. For example, during the pandemic Lloyds halted and BP reduced the payouts. So I would diversify across a range of companies operating in a range of business areas.
I would also focus on finding businesses I felt had the ability to make big profits in future and pay them out to shareholders. To that end, I look for firms with a competitive edge in a market I expect to see sustained customer demand. I also pay attention to balance sheets. For example, Vodafone has a lot of debt and operates in an industry with high capital expenditure requirements. There is a risk that could mean that it makes big profits but uses them for a purpose other than paying out dividends.
The amount of income I might earn from this plan depends on the average yield of the shares I buy. For example, if I invest my first year’s savings in shares with an average yield of 5%, that should earn me around £55 in dividends per year.
Over time, as I saved more, hopefully my passive income streams would grow. I would keep saving and investing, ideally becoming a better investor the more I learnt. A steady plan of saving £3 a day and hunting for the right sort of businesses in which to invest could hopefully see me earn more each year without working any harder. Best of all, I could start today with just £3!
Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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