My £5 a day passive income plan

Is it possible to earn a passive income by saving just £5 a day? Our writer explains how he would try to do it by investing in UK dividend shares.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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I think it’s possible to earn passive income putting aside a fairly small amount of money regularly. By investing in UK dividend shares, here’s how I would aim for passive income using £5 a day.

How can dividend shares be a passive income stream?

Shares are like tiny chunks of companies. So when a company makes a profit, often it basically divvies at least some of it up among shareholders. Typically the payout – which is called a dividend – is based on the size of one’s shareholding. So, the more shares in a company I hold, the bigger I could expect my dividend payment from it to be if it makes one.

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So far, so good. But there are several points I need to bear in mind. First, not all companies pay dividends. Secondly, dividends are never guaranteed. So even a share with a track record of payouts could cut or cancel the next one. Thirdly, if I use money to buy dividend shares, their value can change over time. So while looking at dividend levels, I seek to avoid the trap of buying a high dividend share whose price could be set to fall.

With those caveats, investing in UK dividend shares ranks among my top passive income ideas. It lets me own a sliver of a company like BP or Tesco. Instead of doing the hard work myself, I can benefit from their large workforces and business strengths.

With £5 a day, I could start now

BP is a massive company with operations around the globe. It’s valued at £66bn. So it might seem a bit odd that I reckon BP would be interested in my humble fiver. It’s worth more than ten billion times that much!

But remember, as I said, shares are like tiny chunks of companies. That £66bn valuation (which we call a market capitalisation) is composed of billions of shares. In fact, I can buy a share in BP and still get change from £5. I wouldn’t do that, though, as typically dealing in shares involves paying some commission. So, to reduce the proportionate impact of such charges, I would wait until I had more money saved up to invest.

At £5 a day, after a couple of months I would have around £300 already. I would be comfortable using that to buy my first lot of UK dividend shares. The couple of months between starting my daily £5 saving habit and making my first purchase of shares could actually be quite helpful. I could use them to research shares in more detail and hopefully try to avoid some common mistakes people make when they begin investing.

Will I really get passive income?

As dividends are never guaranteed, neither would my passive income be.

But over time, I could build up a diversified portfolio of leading UK dividend shares. I could add in overseas income picks too, though it would take time to do my research and make sure I knew the risks. Hopefully, for just £5 a day, that diversified portfolio would help me improve my likelihood of a growing regular passive income stream.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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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