Passive income is money that one receives without working for it. From a little extra spending money to laying the foundations for lifelong wealth, passive income can come in handy.
Some of my favourite passive income ideas are UK dividend shares. Here’s how I’d aim to set up passive income streams from UK dividend shares for just £20 a week.
Step 1: setting up a saving habit
One reason I like UK dividend shares is because they don’t necessarily require a big capital outlay. I could simply set aside some spare funds each month or week, and gradually build them up over time.
Setting a weekly target even of a small amount could help. For example, putting aside £20 each week, I’d already have over £1,000 to invest within a year. A regular saving habit could help me build up funds while hardly noticing the weekly £20 outlay.
Step 2: research, then research more
One of the biggest mistakes I’ve seen passive income hunters make is putting money into a project or investment very fast, without doing proper research.
UK dividend shares carry all sorts of risks. For example, a high dividend could suggest the City expects a downturn in profits. Meanwhile, a company in a cyclical industry with a juicy dividend could suddenly cut the dividend when the cycle enters a downward phase.
So I would take a patient approach, and properly research any UK dividend shares into which I wanted to invest. Rather than focussing just on current dividend yield, I would dig into a company’s future likely revenue streams and business model.
That research takes time, but would help me be clearer headed in choosing UK dividend shares. For example, tobacco company Imperial Brands yields 8.9%. But cigarette demand is falling in key markets, and the company cut its dividend last year. Alcohol giant Diageo yields less than a quarter of Imperial: 2.1%. I like its portfolio of premium brands, but there is also a risk alcohol sales will fall. Is the industry in the same danger as tobacco? Does Diageo’s long history of revenue growth merit a premium? Speaking of growth, scientific instrument maker Judges Scientific may only yield 0.8%, but its business has strong proven ability to expand revenues and earnings, as seen in recent years.
Among these three UK dividend shares, which would suit my passive income objectives best? How much am I willing to exchange future growth prospects for higher yield now? I think there’s an investment case to be made for each of the three – and a case against. So for sure I’d want to learn about each company before investing any money in it. Instead of falling into a value trap hunting passive income, I’d take time to do my homework before investing.
Step 3: buying, then being patient
Having shortlisted some shares, I’d start to buy once my weekly £20 savings had grown to a decent sum. To reduce risks, I’d diversify across shares. In the first year I’d put roughly £500 into each of two shares.
Once I’d bought, I’d sit back and wait. Dividends are never guaranteed, but I’d try to fight the urge to trade often. If I’ve researched carefully and chosen attractive UK dividend shares, I should be able just to sit back and hopefully watch my passive income streams grow over time.
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Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Diageo, Imperial Brands, and Judges Scientific. 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.