As the end of the year approaches, my thoughts naturally turn to the future. Part of that is financial – how can I improve my earnings in 2023 and beyond, without simply working more hours? One way is to set up some passive income streams.
Passive income ideas come in all shapes and sizes. My own approach is to try and benefit from the hard work of blue-chip companies with proven business models, by investing in dividend shares. Here is how I would do that if I wanted to target £5,000 a year in passive income.
1. Start saving regularly
I could buy dividend shares by investing a lump sum up front. But not everyone has a big pile of money sitting around, waiting to be invested.
Instead, I could put aside some money on a regular basis that lets me build up investment funds. How much depends on my own financial circumstances.
2. Get ready to buy
It would take me some time before I had saved enough to begin buying shares. But I would want to be ready for when that time came.
So, I would set up a share-dealing account or Stocks and Shares ISA. By putting my money into that as I saved, I would be ready to spring into action once I had enough money to invest and found some shares I liked.
3. Understand share hunting
Core to my success (or failure) will be my ability to buy shares at an attractive price that pay me dividends both now and in the future. After all, dividends are never guaranteed.
But how would I learn to hunt for such shares?
I would be looking to pick up or hone a couple of skills. One is spotting firms that look likely to throw off spare cash long into the future that could be used to fund dividends. Secondly, I would need to get to grips with how to value shares. That matters because how much I pay for a share influences what my future return will be.
Imagine a share pays 5p per year in dividends and costs £1. Its yield is said to be 5%. If I bought the same share for 50p, that dividend would equate to a 10% yield. That could help me generate more passive income.
But I would not simply chase yield. Instead, I would focus on finding great businesses with strong dividend potential, trading at an attractive price.
4. Start investing
Once I had enough money and some investment ideas, I would start to invest.
Companies can do better than expected, but they can also do worse. So I would invest in a variety of firms, to reduce the overall risk to my passive income streams if one of them performed poorly in future.
5. Let the passive income roll in
Then I would sit and wait for the income to start piling up. I already earn regular passive income from shares I own like British American Tobacco and M&G.
At an average yield of 5%, for example, I would need to invest £100,000 to hit my £5,000 annual target. Saving regularly, it might take me many years. But, over time as I saved, hopefully my passive income streams would keep growing.
