With £0 of savings, here are my top 3 passive income ideas

Jon Smith explains how he can still make passive income using different strategies even if he doesn’t have any savings.

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Some people think they need to have a huge upfront pot of cash to invest in dividend shares to make passive income. Sure, this certainly helps me to start making money quickly. But it isn’t the only way to take advantage of the dividends being paid out. So even if I had £0 in my savings account right now, here are my top passive income ideas to get going.

The high-yield option

I need to have an idea of how much I can afford to cut back on from my current pay cheque. This might involve not eating and drinking out as much, or finding cheaper alternatives to things I buy each month. However I do it, I want to have a monthly figure in mind that I can then put to work. I’m going to say that I’ll target £100 a month to begin with.

My first idea involves taking this full £100 a month and putting it into high-dividend-yield stocks. There are currently seven shares in the FTSE 100 and FTSE 250 that have yields above 10%. Even with me wanting to avoid a couple due to their business outlooks, I feel comfortable investing in several others. This helps to spread my risk but ultimately keeps my yield high.

Then, when I receive the dividend payments, I’ll put the income into my savings account. That way I build both my investment pot and my cash savings.

A long-term vision

Another idea I like is to target lower yielding stocks with my full £100 each month. There are some great options with yields in the 4%-6% range that have a strong track record of paying out income for many years. This will help me to build up a portfolio that I hopefully won’t have to tinker with much in years to come.

In contrast to high-yield options that I might have to sell and replace if the dividend gets cut, dividend stalwarts should help me to focus more on making money from my main job, rather than stressing out on making changes to my portfolio.

I’d take the dividend income and again, put it back into my savings account.

Benefiting from compounding

A third option is for me to invest fully each month, but also reinvest the dividend proceeds when I get paid. This won’t increase my cash savings at all, but it will allow me to benefit from compound growth of investments.

For example, let’s say I’ve grown my pot so that I own £500 in a single company. This firm has a dividend yield of 5%. I get paid the £25 and buy more shares in the business. Next year, I have £525 that’ll earn me £26.25. This might not seem like a huge jump, but replicate this across all my stocks and over multiple years and this really does add up.

Passive income risk

I think that each of the three ideas can work well. However, the important thing for me to remember is that no dividend is guaranteed. A business can cut the payout completely if the management team chooses. This would throw all of my future calculations off.

Fortunately, holding multiple stocks can help to reduce this risk to a manageable level.

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 assessed. Consider taking independent financial advice.

Jon Smith 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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