A lot of people want to earn extra money without working for it – but they lack a practical plan to try and achieve that. One of my favourite passive income ideas is investing in dividend shares.
I like that approach because it really is passive. It also has the benefit of not requiring a lot of capital upfront. In fact, even if I was starting with nothing today, I think I could set up passive income streams with just £10 a week. Here is how I would go about it.
A little and often
Putting aside £10 a week may not sound like much. But in a year, that would add up to over £500. That could form the foundation of my income streams, even if they are modest at first.
I think it is helpful to get into the habit of saving regularly. Of course, life will throw up financial challenges from time to time that may distract me. If I have already got into the discipline of saving regularly, hopefully I would be better able to overcome such challenges without sacrificing my passive income ambitions.
I would save the money in a share-dealing account or Stocks and Shares ISA. So, when I am ready to invest, I should be able to do so immediately.
Dividend shares as passive income ideas
But what exactly do I plan to invest in?
What I called dividend shares above is just one way of describing stocks that pay shareholders dividends. A dividend is like a tiny slice of a company’s profits. They are never guaranteed: a company may not make a profit and even if it does, it can decide not to distribute it to shareholders.
In fact, that explains two key elements of my passive income plan. First, I would focus on what I thought a company’s dividend may be in future, not just what it is today. Second, I would use my weekly £10 to invest in a variety of companies, not just one or two.
Hunting for investment ideas
So, how could I find shares I hope would pay meaty dividends in future?
Instead of focusing just on the share, I would follow billionaire investor Warren Buffett and look at the overall business. Does it have a unique competitive advantage, like Coca-Cola enjoys thanks to its collection of brands? Is it likely to see resilient customer demand, like energy network operator National Grid?
After all, I am looking for a company that can make profits in future to pay as dividends. To do that, it will need a customer base and something to set it apart from competitors. I would also look at anything that could stop it paying out such profits as dividends, such as debt or high capital expenditure needs.
Finally, I would look at what is known as dividend yield. That helps me manage my expectations of what I might receive as passive income each year. For example, investing £10 a week for a year in shares with an average yield of 5% would hopefully pay me dividends of £26 annually. If I find promising shares and keep putting aside £10 a week, that may only be the start. Over time, I would aim to earn more by investing — without working any harder!
