Want to earn more money without working extra hours each week for it? Loads of people do. Like millions, I aim to earn such passive income by investing in carefully selected blue-chip shares I hope might pay me chunky dividends in the future.
Buying such shares need not cost huge sums of money. In fact, I think I could put such a plan into action for just £5 a day. Here is how I would go about it.
Dividend shares
When a company makes a profit, it can choose to reinvest it in future growth. That is the approach taken by some businesses including Google parent Alphabet.
But another option is to divvy some or all of the money up among shareholders in the form of dividends.
Such dividends have no set size and indeed are never guaranteed. Some are tiny. But others can be substantial. For example, at the moment, Vodafone has a dividend yield of 10.5%. That means if I invest £1,000 in Vodafone shares today, I would hopefully receive £105 in annual dividends – if the payout is maintained at its current level.
Passive income streams
By investing in such shares, I could start to build up my dividend income.
As dividends are never guaranteed, I would spread my investments over a range of industries and businesses to reduce my risk if one firm reduces or stops its payout.
I would also take time to find companies that I felt offered me strong future passive income prospects. Rather than just looking at historical yields, I would focus on the business and its valuation.
That involves hunting for companies I think have a competitive advantage in an industry I expect to experience strong customer demand in years to come.
Just finding a strong business is not my only criterion when buying shares though. Valuation also matters. The yield I get from a share will depend not just on the dividend’s size but also how much I pay for the share when I buy it.
Lifelong income
If I manage to achieve a dividend yield of 5%, investing £5 daily for one year ought to earn me around £91 in passive income annually.
A higher yield could earn me more. But I do not buy shares just because of their yield. My primary focus is always buying into great businesses at attractive valuations.
Over time, as my portfolio grows, hopefully my dividend income will too. Indeed, if I keep investing, I expect that my passive income could hopefully span decades to come. If I choose the right shares and keep putting aside just £5 a day to put towards such a plan, it may keep growing over the long term.
Such a plan need not cost the earth. But, however much I invest, buying the right shares at a good price will be important for my long-term success.
