Getting some extra money on a regular basis could help with expenses from housing to holidays. But there are only so many hours in the day. That is why, like many people, I have been trying to develop passive income streams. In other words, I am aiming to boost my earnings without increasing my working hours. One of the ways I do that is by investing in dividend shares. Here is how using a passive income plan costing just £5 a day can hopefully help me earn more — without working harder.
Dividend shares as passive income ideas
How does this approach work?
Many firms pay at least some of their profits to shareholders as dividends. Dividends are a sort of reward for owning a share. But they are never guaranteed – even a company that pays dividends today can decide not to do so in future.
If I put money into shares I hope will pay dividends in future, it should help me build my passive income streams. Take Tesco as an example. Its dividend yield is 4%. That means if I put £100 into Tesco shares, I would hope to earn £4 a year in dividend income until I sell the shares.
Actually, the amount could even increase in future. For example, Tesco might report good business results and increase its annual dividend by 19%, as it did last week.
Then again, Tesco could run into unexpected difficulties and scrap its dividend altogether. That happened in 2015. That is why I invest in a portfolio of different dividend shares. That reduces the overall impact on my passive income streams if one of them runs into difficulties.
How much can I earn?
If I invested in a portfolio with an average yield of 4%, the same as Tesco, how much money would my passive income plan earn me annually? £5 a day adds up to £1,825 in a year. And 4% of that would be £73.
But I think I would invest in shares with a higher yield. A higher yield can mean more risk. So I do not invest in companies just because they have a high yield. Rather, I am looking for businesses I think can generate enough spare cash in years to come to maintain or raise their dividend.
I think I can invest in some such companies and target a 6% yield, pushing my annual passive income over £100 from my first year of putting aside a daily fiver. For example, insurer Legal & General yields 6%. British American Tobacco has a 6.7% yield and I already hold it in my portfolio. Both shares carry risks. Price competition could hurt profit margins for insurers, while declining cigarette use could lead to lower revenues and profits at British American. But hopefully my diversification could offer me some protection against such risks.
Putting my passive income plan into action
A plan is not much use unless I put it into action.
To do that, I would set up a share-dealing account or Stocks and Shares ISA, then start putting my daily £5 into it.
Then I would hunt for the sorts of shares I described above – businesses I reckon could generate surplus cash for years to come. That could be paid out as dividends, boosting my passive income.
