I like the idea of being rewarded far into the future for work I do today. But more than that I like the idea of being rewarded far into the future even if I do not work today! That is why I am setting up passive income streams now by buying dividend shares.
Doing that does not necessarily take a lot of money. Here is how I could go about it by putting aside £5 a day.
Getting into a saving habit
Core to my plan is buying dividend shares. But to do that I will need to have money to invest.
Even starting with nothing, I could still use such a plan by building up savings over time. I would try to target a regular amount, to get into a habit. Setting my goal at a level I thought was realistic even when other spending priorities reared their head seems sensible. I reckon £5 a day would be doable for me.
I would put my money into a share-dealing account or Stocks and Shares ISA. That way, once I have the right amount of money and identify shares I like, I will be ready to start buying – and hopefully earning passive income.
Finding shares to buy
But how could I look for such shares?
Dividends are basically a way for businesses to share some or all of their excess cash with shareholders. Some companies generate lots of excess cash, but keep it in the business for purposes like investing in growth. That helps explain why even large and massively profitable companies such as Google parent Alphabet do not pay dividends.
So I would look for businesses I thought could generate substantial free cash flows and that might be willing to pay them out as dividends to shareholders. Owning such shares could help me build my passive income streams.
Long-term profit prospects
What sort of characteristics might such a business have?
If it operates in a market with large customer demand that is likely to endure, I see that as positive. But I also like a firm to have some competitive advantage within such a market. That can help set it apart from rivals, rather than just getting trapped in a race to the bottom when it comes to pricing, hurting profitability.
I also would consider whether the company had competing demands on its free cash flow, such as debt repayment or capital expenditure.
No matter how much work I put into finding such a company, though, things could turn out differently to my hopes. So I would diversify my portfolio across a number of shares in different business areas.
Setting up passive income streams
The amount of passive income I might earn would depend on the average dividend yield of the shares I buy.
Putting aside £5 a day would give me over £1,800 each year to invest. At an average dividend yield of 5%, for example, my first year’s saving could generate passive income of around £91 per year.
Although dividends are never guaranteed, if the companies I chose kept paying them, I would earn such dividends for as long as I owned the shares. Hopefully, five pounds a day could help me set up passive income streams to last a lifetime.
