With a spare fiver a day, can I set up passive income streams? The answer, in my opinion, is yes – although in the beginning the income will probably be modest. But hopefully over time it can start to grow into something more substantial. My approach would be investing in dividend shares. Here is how I would go about it.
Dividend shares as passive income ideas
The attraction of dividend shares for me is that the income I could earn really is passive. All I need to do is invest money in the shares, sit back, and wait for any income to come my way.
That is never guaranteed, though. Not all shares pay dividends. Even those that do can cut or cancel their dividends, for example because profits fall or they need the money to invest in their business. If I had bought shares in Shell or BP a few years ago, for example, I would have seen my passive income fall as both of them cut their dividends.
That is why, when choosing dividend shares for my portfolio, I always make sure to diversify across different companies and indeed business areas.
Starting with £5 a day
If I wanted to use more than £5 a day to set up my passive income streams, I could do. But I do not have to. In fact I think that is one of the attractions of building a dividend share portfolio as a source of passive income. Unlike alternative passive income ideas like buying a property to let, I can start with nothing and contribute a small amount each day over time to build up an income-generating asset base.
£5 a day may not sound like a big amount. But it adds up to over £1,800 in a single year. If I was to target an average dividend yield of 5%, I would hopefully earn £90 in passive income annually from the shares I bought in the first year alone. If I kept putting away my £5 a day, over time my portfolio would grow — and hopefully so would the dividends I got from it.
Finding shares to buy
One of the challenges if I was investing in shares for the first time would be figuring out what ones were right for me. Some might offer a high yield but have problems lurking beneath the surface. For example, the yield might be funded by profits from a business that is in rapid decline.
Or there may be a company with an excellent business but whose shares that are already priced high. For example, I like the dividend growth outlook at Judges Scientific. But with the current yield below 1%, it would not be one of the shares I would choose if I wanted to target an average dividend yield of 5%.
My approach would be to focus on high-quality companies that are in business areas I expect to be around for decades to come. Within that field, I would look for companies I think have the ability to keep generating strong free cash flow. That is what funds dividends — and those are the backbone of my passive income strategy.
