Passive income is a popular idea – and it is easy to understand why. Growing your income streams without adding to the daily grind has an understandable appeal.
But many passive income ideas require a lot of money upfront. Buying a property to rent out might earn me income – but it probably also needs a big deposit. That is why my favourite passive income idea is investing over time in dividend shares. If I wanted to start doing that today with a spare £20 each week, here is how I would go about it.
Getting into a habit
I think £20 is a good amount to target at first, as it is large enough that I could start to earn passive income from saving it, but not so big that I am likely to abandon my scheme as unsustainable.
Putting aside money on a regular basis could help me get into the habit. That way, when life threw up other spending needs unexpectedly, hopefully I could keep going with my regular saving.
I would put the money into a share-dealing account or Stocks and Shares ISA. Doing that means it should be ready for me to invest immediately once I had identified some income shares I felt matched my objectives.
Finding dividend shares to buy
But how would I look for such shares?
If I was investing for the first time, I would definitely try to keep things simple rather than complex. I would stick to industries and companies I felt I understood and could assess. If there were none, then I would choose to learn about some. For example, if I felt lithium was a promising technology, I could read up on it and the main players. I might do the same for companies I was already familiar with from my daily life, such as Greggs or Nike.
What would I be looking for? Core to my passive income plan is investing in companies that pay dividends. That is never guaranteed, even if it has happened regularly in the past. Dividends are basically a form of profit sharing, when a company distributes money to shareholders. For that to happen in future, a firm essentially needs to keep making money. So I would focus on firms with a business model I thought set them apart from competitors and operating in an industry I expected to see strong future customer demand.
Setting up my passive income streams
Some companies meet that description — but do not currently pay dividends. For example, I think Netflix might be able to fund a dividend in future – but it does not pay me one as a shareholder at the moment.
With passive income as my focus, I would therefore limit my search to companies that are already paying dividends and that I hope can keep doing so.
How much I might earn will depend on the average dividend yield of the shares I buy. £20 a week would add up to £1,040 in the first year of my passive income plan. If I invested that at an average yield of 5%, for example, I would hopefully receive annual dividends of £52.
That is only the first step. Over time, if I keep adding money regularly, my passive income could increase. But I could start small, today!
