The old saying goes that you need to spend money to make money. Working might let you earn without spending money, but you spend time. Arguably that is more valuable.
In future, you may well have more money, but you will never have more time left to you than you do today. That helps explain why many people aim to earn money without using up time. That is passive income.
I invest in shares, hoping I can earn dividends from them without having to lift a finger. That approach may require me to spend money to make money, but I can start on a modest scale. Here is how I would go about it with £5 a day.
Regular saving
Putting money away regularly could help me get into a disciplined saving habit. I believe that is useful, as I would like to keep saving even when other spending priorities pop up (as they inevitably do).
To save, I would set up a share-dealing account, or Stocks and Shares ISA. I would put my daily £5 into that.
Setting up income streams
Simply buying shares may not be enough to make my passive income dreams a reality though.
Many companies do not pay a dividend. Even when they do, it is never guaranteed. At any moment, a board of directors can decide to stop paying out, for example because they have other spending priorities, or the business simply is not generating enough spare cash.
So I look for large, proven companies I think can generate sizeable free cash flows to fund dividends for years to come.
Not only that, but I always invest in more than one company. Even the best business can run into unexpected challenges.
Defining quality
What sort of filters do I apply? I focus on business areas I understand and think I can assess. I am looking for areas I think will experience high customer demand far into the future.
But large demand does not necessarily translate into a profitable business. Look at clothes retailing as an example. Billions of people will keep on wearing clothes for decades to come, yet lots of retailers go to the wall, or operate on razor thin margins.
Not all do though. Next and Gucci do not, for example. They are at different parts of the cost spectrum, but both have some competitive advantage that helps set them apart from competitors. It is the same story with Unilever. Bleach is bleach, but there is only one Domestos brand – and Unilever owns it.
Whether it is a brand, proprietary technology, patent, distribution network or some other unique asset, having something that helps separate a company from rivals can help it make profits even in a crowded market.
Moving to action
Unilever has a dividend yield of 3.4%. So owning its shares ought to earn me £3.40 in annual passive income for each £100 I invest.
In the current market, I think I could target a higher average yield while sticking to quality companies. £5 a day adds up to £1,825 per year. At a 5% yield, one year’s savings could earn me just over £90 in passive income.
If I hold the shares and the dividends are maintained, I could keep earning year after year.
