In inflationary environments, having some extra passive income can come in handy. And despite popular belief, the stock market is an excellent way to establish this, even with a small sum of capital.
In fact, setting aside £3 a day is enough to get the ball rolling. And starting today could establish the start of a lucrative secondary income stream by January next year. Here’s how.
Start saving regularly
Now £3 a day doesn’t sound like much. But over time, it can add up to some significant savings. Even for families strapped for cash, it’s a goal that can potentially still be achieved with a few sacrifices. For example, by cancelling a largely unused subscription or skipping a morning coffee.
After about three months, investors could have roughly £270 in the bank. The passive income process can already begin by keeping this growing pile of savings in an interest-bearing account. However, once a more substantial sum has accumulated, investing in dividend shares could be the far better destination.
What are dividends?
When a company produces excess earnings it doesn’t have any better use for internally, this capital is returned to shareholders via a dividend. In other words, just by holding onto some shares in a profitable dividend-paying enterprise, investors can earn money while sleeping.
As marvellous as this sounds, there is a catch. Shareholder payouts are funded by profits. And should those profits dry up, dividends will likely be put on the chopping block, or even outright cancelled.
However, the opposite can also be true. If earnings continue to grow, dividends will likely follow.
Following the recent interest rate hikes by the Bank of England, many savings accounts are now offering rates of around 5%. That’s actually higher than the FTSE 100’s 4% average yield. But while they’re riskier, the potential of future dividend hikes can turn them into far better income streams over time.
For example, over the last 10 years, Safestore Holdings has increased its dividend consistently. And any investor who bought shares back in 2013 is now sitting on a yield of over 50% annually on an original cost basis!
Building a portfolio
Not every income stock has achieved the stellar track record of Safestore. As I’ve already said, dividends can end up going down, leaving investors worse off. And that’s why it’s essential to carefully investigate every business before adding it to a portfolio.
However, even the best-looking enterprise can still backfire. As recent years have demonstrated, disruption can emerge quickly and without warning.
For those who don’t want to see their passive income potentially become compromised, diversifying across multiple companies in different industries is a prudent strategy. After all, if one becomes compromised, the others can absorb the impact.
