Passive income is money earned without working for it, and targeting dividend shares is a good way of achieving this goal. But as the economic situation worsens, I have been thinking about what could happen if a recession affected businesses.
If I had £3 a day to spare, here is the passive income plan I would use to buy shares in blue-chip companies.
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The attraction of blue-chip shares
Well-known businesses with long histories can struggle in a recession too. No dividend is ever guaranteed and even blue-chip companies can cut their payout. Indeed, in 2020, I owned Shell feeling somewhat reassured by the fact it had not cut its dividend since the Second World War. Despite that, the energy major went ahead and cut it!
But I still see good reasons to consider investing in blue-chip shares when a recession looms. A company with a long history will likely have survived quite a few recessions. That can mean its business model is reasonably resilient.
For example, challenging times in the gas business have already seen some smaller suppliers go to the wall. Energy price swings can be challenging for large companies like SSE and United Utilities too. But they have some strengths many smaller competitors may not, from large customer bases to experience of how to ride previous recessions.
Saving £3 a day
The heart of my passive income plan is buying dividend shares – which takes money. So I would put aside a set amount regularly into a share-dealing account, or Stocks and Shares ISA.
£3 a day strikes me as an affordable amount. Over time, I could save up and buy more and more dividend shares. Hopefully that would let me benefit from increasing dividend streams.
If I stuck to my plan, I should save around £1,095 a year. Investing that in dividend shares yielding an average of 5% would hopefully generate annual passive income of around £55. Over time, if I keep saving and investing, that figure could grow.
Putting my passive income plan into action
Simply saving the money is only one part of my plan. To earn dividends, I would need to invest it. Even though I am aiming to buy shares in quality companies, any business can run into unexpected difficulties. So I would diversify my passive income streams by buying shares in a range of different businesses.
To choose them, I would look for companies offering products or services I felt would be likely to stay in demand, even during an economic downturn. I would look for a competitive advantage that could help a firm make profits, even in a crowded marketplace. Crucially, I would also consider whether the share price was attractive.
The higher the dividend yield, the more passive income I might earn. But simply chasing yield can lead to future disappointment, if a company’s underlying business is not strong enough to support the dividend.
So when choosing shares for my passive income plan, I would always focus on a company’s business outlook. Only if that looked strong would I look at its dividend yield and decide whether it might be attractive for my portfolio.