I’d aim to start earning passive income for £6 a day

Christopher Ruane explains how putting aside a few pounds a day to invest could lay the foundation for ongoing passive income streams.

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One way to earn passive income is simply to put some money towards buying shares in blue-chip companies that pay dividends.

That approach means I do not need to work hard to earn the money. Instead, I can benefit financially from the business success of large firms with lucrative competitive advantages, like Unilever or National Grid.

I would not even need to have saved any money upfront to set the ball rolling on such a scheme. Here is how I would aim to build passive income streams for £6 a day.

Put money aside like clockwork

Getting into a regular savings habit is at the core of my plan. So I would set up a share-dealing account, or Stocks and Shares ISA, then get into the habit of regularly putting money in.

If I could afford £6 a day I could do that. But it is important to cut the clothes according to my cloth as everyone’s financial situation is unique. I would want to target an amount I thought was realistic for me. That would help me stick with the plan.

Learn about the stock market

Before plunging into the stock market, I would take time to learn about how it works.

For example, if some companies suddenly and unexpectedly do badly, how could I manage my risk? One technique would be to spend time learning to read company accounts and looking out for red flags. I would also plan to diversify my ISA across a range of shares.

A crucial concept to pick up before I start putting money down would be how to value shares.

Just because a company looks like it has a brilliant business, such as Apple or Microsoft, does not necessarily mean it will be a good investment. That depends on what I pay for it relative to its valuation.

Yield matters but is not the main thing

Not only is valuation important, but to earn passive income from my investments, I would need them to pay dividends.

Apple has a pretty small dividend yield right now, of 0.6%. Some FTSE 100 shares offer around 15 times as much.

But dividend yield alone cannot tell me whether a share is a good fit for my investment objectives. Dividends are never guaranteed and companies such as Shell and Direct Line have all cut theirs in recent years.

So I look at the underlying business strength and try to understand if a company looks well-positioned to throw off excess cash in coming years that it will not need for some alternative activity like paying down debt.

Target in sight

Saving £6 a day would give me £2,190 each year to invest. If I invest that at an average dividend yield of 7%, my first year’s investments alone will hopefully earn me around £150 in passive income each year.

Over time, as I keep up my regular saving and investing, hopefully my dividend streams will grow.

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 Apple, Microsoft and Unilever 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.

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