Working more is not the only way to increase one’s income. For example, many people earn passive income by investing in dividend shares.
Doing that does not necessarily require a lot of money. Here is how I would seek to start doing it this summer, for just £3 per day.
Regular saving habit
Putting aside £3 per day may sound fairly modest.
But over time, that would add up. In one year, saving at that rate would mean I had over £1,000 to invest.
A regular saving habit could help me form a healthy financial habit for the long term.
I would put the money into a share-dealing account or Stocks and Shares ISA so that I would be ready to invest it when I had identified some dividend shares I wanted to buy.
Finding shares to buy
But what shares would I buy?
If I was going to purchase a business, I would ask myself some simple questions.
Is it profitable? Does it have a lot of potential customers it can target? Is there something that can help set it apart from competitors? Does the business generate spare cash, or would the profits need to be reinvested for growth or to pay down debt?
A share is essentially a stake in a business. So, when hunting for dividend shares that I hope can boost my income, I ask the same sorts of questions.
Passive income example
Take British American Tobacco as an example.
It owns iconic brands like Lucky Strike and has millions of customers. It has raised its dividend annually for decades.
Currently, the firm’s dividend yield is 8.9%. That means that, if I invested £1,000 into the shares, I would hopefully earn £89 in passive income per year from dividends.
Risk management
But dividend history is not an indicator of what will come next.
With fewer people smoking, a company like British American may see profits fall. It also has substantial debt on its balance sheet. That can eat into a company’s ability to fund dividends.
So, while I do like the business and own its shares, I always diversify my passive income streams across a range of companies in different lines of business. In other words, I avoid putting all or even most of my eggs in one basket.
Long-term investing
Some other blue-chip companies have a yield as high as British American. But most do not.
I am not chasing yield, though. Instead, I aim to buy stakes in great businesses at an attractive price. Even if I achieve an average yield of 5%, saving £3 a day ought to earn me around £55 per year in passive income.
The following year, I could save the same amount to invest again – while hopefully still receiving dividends from my prior year’s investments.
In that way, over time, I could hopefully build growing passive income streams.
