How I’d build passive income streams with £5 per day

What can £5 per day get you? How about a diversified portfolio of high-quality stocks for sustainable passive income stocks? Stephen Wright explains how.

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.

Close-up of British bank notes

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.

With inflation in the UK at 10.4%, a fiver doesn’t buy as much as it did a year ago. But I think investing £5 per day in the stock market could build a great passive income portfolio.

Buying shares in companies that distribute their earnings as dividends allows investors to earn income from all kinds of different businesses. And sticking to a couple of basic principles can generate some great results.

Diversification

Saving £5 per day would get me an average of £152 to invest each month. And there are plenty of places I could put that to work in the stock market.

Ultimately, I’d want a diversified portfolio, with income coming from a number of different sources. This would help protect me from specific issues in any particular company or sector.

Lloyds Banking Group, for example, might be a good business. But if I put all of my money into the stock – or even into banks in general – I’d have had a rough time over the last couple of weeks. 

For generating passive income, I think it’s much better to own a diversified group of investments. But instead of investing in a lot of different companies at the outset, I’d look to build this gradually over time.

Each month, I’d look to invest my £152 in whatever I thought was the best opportunity available at the time. This might be an oil stock one month, an insurer the next, and a food company another time.

An important point here is that the only brokerage fees I pay are foreign exchange (FX) fees. So there’s no advantage for me in waiting longer and investing fewer times per year.

If I were paying fees per transaction, I wouldn’t be looking to invest monthly. Instead, I’d look to buy shares either quarterly, or once every six months in order to keep costs down.

That way, I’d get a portfolio of investments in companies from different sectors, as well as different geographies. I’d be earning passive income from various different sources, while trying to minimise my risk.

Compounding

The key to turning my £5 per day into something significant is by reinvesting the dividends. As a result, I’d use the income I received to produce even more income.

I think rising interest rates are creating some really nice opportunities in dividend stocks. Aviva, Forterra, and Rio Tinto, for example, all have dividend yields above 7%.

If I reinvested my dividends at a 7% annual return, the results could be quite significant. After 30 years, I’d have a portfolio generating a pre-tax monthly income of £1,043, which I think would be a great result.

Dividends aren’t guaranteed and it’s certainly possible some stocks might return less in the future, of course. But diversifying my investment is the best way to limit the risks of specific companies and industries.

I think that history teaches us two things about investing in the stock market. The first is there will likely be ups and downs over a 30-year period – times when prices are high and times when they are low.

The other is that buying shares in good companies generates good returns over time. It’s really important to be patient, but sticking with the process can really pay off in the long term.

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.

Stephen Wright has positions in Aviva Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

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

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Here’s how I’d aim to build a £50K SIPP into a £250K retirement fund

Our writer outlines the approach he would take to try and increase the value of his SIPP multiple times in…

Read more »

Investing Articles

9.4%+ yields! 3 proven FTSE 100 dividend payers I’d buy for my Stocks and Shares ISA

Our writer highlights a trio of FTSE 100 shares with yields close to 10%. He'd happily pop them into his…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »