New Year’s resolutions might seem a distant memory now. But some people who started this year with the intention of generating income without working for it will already be reaping the rewards. I think it is never too late to start generating passive income. Here is a passive income plan I could start using today.
Using money to earn money
The plan relies on buying shares that would pay me dividends. To purchase them I will need money. If I do not have that money today, I could save it bit by bit. In this plan I would save £35 a week, although if I could not afford that it would be possible to start with a lower amount.
The key point is that I should get into a regular saving habit. Over time that can add up to a substantial amount. Indeed, within a year I would have saved over £1,800. That is more than enough for me to start buying dividend shares.
Dividend shares and the passive income plan
Dividends are basically a small slice of profit a company pays out to people who own its shares. Although the dividend is a set amount per share each time, as a passive income hunter I also need to consider what is known as the yield. If I pay £1 for a share and it pays me a 5p per share dividend, my yield is 5%. But if I paid £2 for the same share and the dividend is the same, my yield would only be 2.5%.
That makes a big difference. If I invest my first year’s savings of £1,820 at an average yield of 5%, I should get £91 of passive income per year. But if the yield is 2.5%, my annual passive income would be only £45.50.
So when looking for shares to buy, I would not just look at the dividend I expect a particular share to pay. I would also consider the share price – and what that means for my potential yield.
Finding shares to buy
So, how would I find shares with an attractive yield?
Well, actually I would not start by looking at yield. Instead I would first try to find businesses I expected to generate profits for years to come, that could fund dividends. For example, I expect ongoing demand for supermarkets so would consider a share like Tesco. I feel the same about electricity distribution, so would also consider National Grid for my portfolio.
Only once I had found such companies would I then begin to consider their yields. Dividends are never guaranteed, so rather than just look at their current dividends I would consider how likely I think a company is to pay out at the same or higher level in future.
But I could make a mistake. Tesco profits might suffer as customers shift online, for example, or National Grid could need to spend more heavily than before on its infrastructure. So I would spread my investment across a diversified range of shares. First though, I need to find the right shares for my own investment objectives.
