Building a passive income stream can be challenging and often requires considerable starting capital. After all, starting a business, or investing in rental real estate, isn’t exactly cheap. But dividend shares have a far lower barrier to entry. And even sparing just £50 a week is enough to get the ball rolling.
So how can investors turn regular savings into an income stream in the long run?
1. Start saving regularly
Depending on the household, sparing £50 a week, or £200 a month, from a monthly salary, can be difficult. Yet simple sacrifices like cancelling a rarely-used subscription or skipping a morning cup of coffee can free up a surprisingly large chunk of monthly capital. And daily savings of just £7.14 is all that’s needed to hit the £50 weekly target.
After three months, around £600 will have accumulated. And that’s more than enough to get started in building a passive income investment portfolio.
Why not start investing as soon as the first £50 is saved? While that’s possible, it may do more harm than good. Buying stocks and shares isn’t free. And on each transaction, a commission is charged that’s usually around £10.
Suppose an investor were to invest with just £50. In that case, the investment would need to generate roughly a 20% return before it can break even after commissions. By comparison, a £600 investment would only need an approximate 1.7% return to break even.
2. Find high-quality companies
When buying shares, an investor is actually purchasing a small piece of a business. That entitles them to an equivalent slice of the profits, making up the building blocks of their passive income stream. But a house built out of poor-quality materials is likely to collapse. And the same thing is true for a stock portfolio.
Not every business is a top-notch enterprise. Many seemingly thriving companies could have glaring holes in their financial statements or business models. And investing in these compromised shares will likely destroy wealth rather than create it.
That’s why investors need to spend time researching a firm’s financial health, risk factors, and long-term potential before adding any shares to their portfolio.
3. Invest consistently
After generating a list of superb businesses, the time has come to start buying shares and watching the dividends roll in. But it’s important to remember that the stock market is far from risk-free. Even terrific-looking stocks can still move in the direction in the short-term, or become compromised in the future from an internal or external factor. And if earnings start to suffer, so will dividends.
This is where diversification comes into the mix. Instead of placing all bets on a single horse, spreading investments across multiple high-quality stocks increases the odds of success as well as reducing risk.
Over the long term, investing consistently in a diversified pool of healthy and thriving companies can unlock quite an impressive passive income stream. Even if a portfolio can only match the FTSE 100‘s 8% average return, that’s enough to potentially transform £50 a week into £300,000 within 30 years, starting from scratch.
