My £8 a day passive income game plan

Christopher Ruane explains how he’d target growing passive income streams by using a daily saving habit to invest in 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.

A young woman sitting on a couch looking at a book in a quiet library space.

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.

The thrill of passive income is money coming in without having to work for it. But, like many thrilling ideas, it can be hard to bring to life.

My own approach is to keep things simple. Large companies with proven business models can often make consistently big profits. By buying shares in them, I hope to receive some of those profits in the form of dividends. They form passive income streams.

Such an approach does not require a lot of money upfront. In fact, I could put it into action with a fairly modest sum each day. Here is how I would go about that using £8 a day.

Saving regularly

I could start with a lump sum if I had one.

But I think there is a benefit to regular, structured saving. It will help me get into the habit of putting money aside in a disciplined fashion.

Putting aside £8 a day means I would save £2,920 each year to invest with the aim of earning passive income. To do that, I would use a share-dealing account or Stocks and Shares ISA.

Choosing dividend shares to buy

Not all companies pay dividends. Those that do choose how much to pay out. On top of that, dividends are never guaranteed even if a company has paid them for decades already and is profitable.

With my focus on buying shares to generate passive income, what does all that mean?

First, I do not focus too much on what a company’s dividend history is but rather try to choose shares based on what I think their future dividend potential is. Secondly, I diversify by spreading my money across a selection of different shares.

Looking at dividend potential

That may sound well in practice, but how do I decide what shares I think have strong dividend potential?

Basically I look for a company that has a strong business and no strong need to reinvest all its profits. So if the business has a competitive advantage in an industry I expect to see strong future demand and does not need to plough the money back into growth or costly expenditure like developing new markets, it would be a candidate for my portfolio.

As an example, discount retailer B&M has a proven retail formula, a loyal customer base and could cut right back on expenditure if necessary by keeping its stores in less-than-perfect condition. For a discount retailer, a gleaning shop is not most customers’ priority.

Growing passive income streams

At its current share price, B&M has a 3.5% dividend yield. That means that, if my first year’s savings of £2,920 were invested in B&M and other shares with the same yield, I ought to earn slightly more than £100 in dividend income.

Other shares have a higher yield, so depending on my choices I could hope to earn a bigger passive income. If I choose well, hopefully the dividends of shares I own will rise over time (though the reverse can also happen).

If I take time to choose great companies when their shares sell at attractive prices, hopefully I could turn my daily £8 into growing passive income streams.

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. 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

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Up 37.5% in just 12 months, I think this is one of the FTSE 100’s best investments

Our author says this FTSE 100 company is likely to keep on capitalising on the AI and data boom. But…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This UK share just spiked 15% on bid news. Can we bag a quick profit?

UK share prices are having a good 2024, so far, and this one's already up 39%. Two takeover bids in…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

I’m ‘blowing a raspberry’ at Raspberry Pi shares. Here’s why

Some early investors have made great profits from Raspberry Pi shares. But our writer's questioning whether the 'easy money' has…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Dividend Shares

Here are brokers’ new price targets for Legal & General and National Grid shares

City analysts are generally very positive on National Grid shares. But they're not quite as bullish on the Legal &…

Read more »