Passive income is almost money for nothing. Almost, in that I need to invest some cash and take some steps before I start earning it. There are numerous ways to do this, but my favoured method is buying dividend shares. This is where I invest in companies that pay a dividend. But there’s always a risk that I’d lose some of my initial investment because share prices can be volatile.
But as long as I thoroughly research each company before I buy, and take a long-term approach, then I’ve got a good chance of earning passive income. Here’s my three-step process starting with £10 a day.
1. Starting early and saving regularly
£10 a day isn’t a lot to begin with. This is why I wanted to start saving as soon as I could. That way, I’m giving myself the best chance to build a bigger pot of money.
To do this I set up a direct debit so my savings plan is automatic. Then, each week I’m able to save £70, which I let build up over time.
Just as important is to choose the right share dealing account. The Motley Fool has a great guide on different accounts here. I picked one from this list, so now my £10 gets paid directly into my account ready for me to start buying dividend shares.
The most important thing is to be consistent in my savings plan and my direct debit helps with this.
2. Searching for dividend shares
Now the fun part – researching dividend shares to buy. And once I’ve built up around £500 in my dealing account, I can start buying shares.
It would be easy for me to simply search for the highest-yielding dividend shares and buy those companies. There are many other things to look for though, and I want to avoid the mistakes that are easy to make when starting to invest.
For example, Glencore has a mighty dividend yield forecast of 10% right now. That’s way more than the interest I’d earn in a savings account. But Glencore operates in the cyclical commodity sector, so profits, and therefore dividends, can be volatile. There’s a fair chance that demand for commodities will reduce in the short term if we see a recession, or if China’s Covid lockdowns persist. If so, Glencore’s dividend may reduce, and so would my passive income.
It always depends on risk-to-reward. I do consider Glencore’s dividend yield as highly attractive, but I wouldn’t want to put all my hard-earned savings into this one company. Diversification always helps, so this way, if one company does cut its dividend, my other investments should offer some shelter.
3. Increasing my passive income
After I’ve built my savings pot up to £500 and researched my investments, I can buy my first dividend share. I’d follow this same process a number of times to buy shares across different sectors.
Saving £10 each day for a year means I’d have £3,650. Then, an average dividend yield of 5% would generate £182.50 in passive income. It’s not a lot to start, but I’m playing the long game. My next step is to increase my £10 daily saving to £20 to really help boost my passive income stream over time.