How I could make a passive income for the cost of a coffee!

Investors don’t need to spend a fortune to enjoy returns with UK shares. Here’s how less than £5 a day could deliver a long-term passive income stream.

Shot of a senior man drinking coffee and looking thoughtfully out of a window

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We all dream of becoming financially independent and, in later years, having the means to retire early. The good news is that there are many great ways that individuals can make life-changing levels of passive income.

I can, for example, purchase a buy-to-let property and receive a healthy rental income. I could receive cashback by using certain shopping websites, credit cards or current accounts. I might decide to take part in peer-to-peer lending using a third-party intermediary.

But my favourite idea for making passive income is by investing in stocks. Using my savings, this is an established method that investors have employed to make a lot of money. And the beauty is that I don’t need a huge amount of cash to get started.

Getting started

Building a portfolio of income-generating dividend shares can cost as little as a cup of coffee a day.

Lets say I begin saving the £3.65 I usually spend on my Caffè Nero Mocha Grande each day. That’s £25.55 every week. This is all it could take to help me make a solid passive income, as I’ll explain in a moment.

That said, based on these calculations, investing each week or month wouldn’t be a good idea for me. By the time I paid broker fees, stamp duty and other costs there would be little left over with which to actually buy dividend stocks.

The key here is to limit the number of times I make an investment transaction. I could, for example, choose to invest the money I saved on my coffee each quarter.

£3.65 saved each day would give me an extra £1,328.60 in my pocket after a year. That would give me a decent £333.06 to invest in each quarter without having to pay excessive fees.

Picking the right stocks

Now comes the tricky part: finding the dividend stocks to invest in.

The key to being a passive income winner is NOT to focus entirely on dividend yield. Remember that yields are based simply on payout estimates from City analysts and not set in stone. If profits come under pressure and the trading outlook deteriorates, actual dividend payments could come in below forecast.

It’s also worth remembering that a successful passive income strategy involves looking at the long term. I need to consider stocks that can pay decent dividends and grow them regularly five, 10, maybe 20 years into the future.

Pleasingly, I think there’s never been a better time to invest in stocks. And there’s a wealth of investing help out there for an individual looking to craft a winning passive income strategy.

The power of share investing

By saving that £3.65 a day and investing it in dividend stocks with a 5% yield I could make £66.43 in passive income in my first year. After 10 years of regular investment I might turn this into an annual income above £660. And so on.

What’s more, if I decide to reinvest these dividends I could supercharge my returns using the power of compounding. But however I choose to use my passive income I have the chance to make a decent stack of cash over the long term.

And if I can find more than that £3.65 a day to invest, I could make truly life-changing returns.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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