Passive income has become a hot topic in recent years. But the basic principle is timeless. How can one earn money without having to work for it?
One way I earn passive income is through investing in shares. The good news is that doing so doesn’t require lots of money. Here is how I would generate passive income by investing in shares, for the price of a daily lunch.
Income-paying shares
While some companies reinvest their profits in their business, others pay them out as dividends. That can be a good source of passive income. I can sit back and wait for the dividends to start coming in regularly.
But there are a couple of important things to note about dividends. First, they vary dramatically. Some companies don’t pay them, while others pay out dividends which equate to 7% or 8% of the share purchase price. Some companies pay, but only a fraction of that level. A second point to note is that dividends are never guaranteed. So even a company with a history of paying dividends for decades can cut its payout, as Shell did last year.
Passive income for the cost of lunch
Dividend shares can be a good source of passive income, but how expensive are they?
Shares sell at different prices, so it’s possible to buy some for just pennies. For example, the bank, Lloyds, pays a dividend and is a penny stock.
Putting aside the cost of lunch each day, I could soon build up enough funds to invest in a wide range of shares. Even just three pounds a day would add up to over a thousand pounds a year. That is more than enough to start implementing passive income ideas.
Investing like a beginner
Let’s say I wanted to start building my passive income streams now by buying dividend shares. I’d first want to understand what I was getting into. For example, what dividend is a company likely to pay out in the future? Past dividend history can be helpful, but it’s not a clear guide to a company’s financial outlook. For that, I would want to look more closely at how a company’s projected future business performance.
Even with careful research, any given dividend stock could still disappoint. That’s why I try to reduce my risk by diversifying across different shares and types of business. So, for example, some of my passive income ideas are tobacco shares such as Imperial Brands and British American Tobacco. But what if declining smoking rates hurt future profits? It could happen. So I try to mitigate that risk to some extent by keeping only a portion of my invested funds in tobacco shares.
Moving to action
The theory may sound good – but I won’t make any money from my passive income ideas unless I actually do something with them.
The discipline of investing even a small amount regularly can help me build up my investment portfolio. Hopefully I could generate more passive income over time. All of that I can attempt for the cost of a sandwich each day.
That’s why I would take action, putting aside money today and learning more about income shares I could choose as passive income ideas.
