How I’d try to generate a passive income for life with just £25 a week

As the stock market turns bullish again, Kevin Godbold discusses a plan to grow passive income for life from dividend shares.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shot of a senior man drinking coffee and looking thoughtfully out of a window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Dividend shares can be a fantastic source of passive income. And with the stock market turning bullish again, I’m keen to invest. But when starting out several years ago, I was nervous about owning shares. And that’s because of the many stories going around about people who had put money into stocks then lost lots of it.

However, in fairness, most of those tales were perpetuated by people who didn’t themselves invest directly in stocks and shares. And the circumstances behind every story often remained unknown. For example, someone might have put all their money into a highly speculative company that went on to go bust. Or another may have bet the farm on a cyclical business — such as one of the banks perhaps — at the ‘wrong’ point in its business cycle. 

Aiming to mitigate the risks

My belief, though, is that it’s possible to mitigate some of the risks that come with shares with a few careful tactics. Firstly, it can be a good idea to diversify money between several different stocks. And I’d choose businesses operating in different sectors.

Secondly, it’s essential to research the enterprises behind each stock opportunity with care. And I’d look for a strong, multi-year record of stable cash-generation and shareholder dividend payments. On top of that, I’d want a company to have a long runway of growth potential ahead for its earnings.

Thirdly, my focus would be on a company’s ability to pay shareholder dividends. And that’s because dividends tend to prove a business has real earnings and not just paper profits. And a healthy dividend yield suggests a business might have a fair valuation.

With such considerations in mind, my passive income plan would involve pooling my £25 weekly savings into monthly sums. And that’s because earned income tends to arrive that way. Then I’d set up a regular low-cost investment arrangement with my share account provider. The money would be invested for minimum fees into my chosen dividend-paying shares.

A focus on the compounding process

However, because of being in the building stage of my portfolio, I’d reinvest dividends along the way either manually or automatically. For example, one option is to use my broker’s low-cost dividend reinvestment facility.  And the reason for reinvesting dividends is to aim for compounding the value of my holdings. 

But the process of compounding works best when conducted over very long periods of time. So an essential part of my plan for passive income for life is the adoption of a long-term mindset. In other words, I’d aim to become a lifelong investor. And that means contributing new money to my investments while I’m working and earning as well as holding my shares for years.  

Positive long-term outcomes are never guaranteed because all shares carry risk as well as positive potential. However, my investments will hopefully be capable of paying a larger passive dividend income later, perhaps when in retirement.

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.

Kevin Godbold 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.

More on Investing Articles

Investing Articles

If I’d invested £1,000 in Tesla stock a decade ago, here’s what I’d have now!

While many of us debate whether Tesla stock is worth the price today, it's undeniable that the EV share has…

Read more »

Investing Articles

Here’s what Michael Burry did as the BP share price dipped!

The BP share price has fallen from its peaks once again, and infamous investor Michael Burry may have spotted an…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

What on earth’s going on with the Barclays share price?

The Barclays share price has skyrocketed in recent months, becoming one of the best-performing stocks on the FTSE 100 since…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Analysts say this amazing FTSE 100 stock is a takeover target!

This FTSE 100 stock's one of the worst-performing companies on the index in 2024. So why might other companies want…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

5.4% yield! 2 UK dividend shares to consider for a £1,080 passive income

I think these UK shares could provide a large and sustainable passive income. And they could be great buys today…

Read more »

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »