How to start building passive income with just £10 a week

A common investing goal is to generate passive income. Zaven Boyrazian explains one proven method, investing in dividend-paying stocks.

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Passive income can sometimes sound too good to be true. After all, the idea of earning money for doing nothing certainly sounds unrealistic. And yet it’s a financial goal that many patient investors have achieved.

By taking calculated risks, investors can put their money to work using the stock market. There are several approaches that can be used. But the go-to method I prefer is capitalising on dividend stocks.

This strategy doesn’t require much capital to get started. In fact, £10 a week is plenty to kick things off. And it may only take a few months before the money starts rolling in.

Getting started

£10 a week isn’t a lot of money. Therefore, investors need to be extra careful to ensure as much of it as possible is actually invested instead of being gobbled up by trading fees. Using commission-free brokerage platforms can help in this regard. But even these services have hidden costs that can eat into investor capital.

Therefore, instead of buying shares every week, I’m actually going to let this build up in an interest-bearing savings account. That way, my money is safe and sound, already earning a little passive income on the side. And after around three months, I’ll have close to £130 saved up, which can then be put to work in a top-notch income stock.

By taking this more patient approach, the number of transactions is drastically reduced. That means fewer fees and larger potential long-term wealth creation. It also gives investors plenty of time to investigate and find a source of reliable passive income.

Searching for high-quality income

The London Stock Exchange is home to some of the best dividend shares on the planet. But while there are plenty of options to choose from, not all of them are investment-worthy.

It’s important to remember that dividends are paid from excess earnings. If a company’s bottom line is under pressure, then shareholder payouts may be slowly losing their appeal. And if things go south, dividends may be put on the chopping block, compromising my income stream as well as leaving me with shares that will likely tumble on the news.

That’s why it’s paramount for investors to carefully analyse each company’s cash flow and financial position. A balance sheet overburdened with floating-rate debt could be a problem should interest rates continue to rise. Similarly, a group that’s already paying out the lion’s share of earnings as dividends will have a far smaller buffer against future disruption.

Finding the best income stocks on the market takes time. And while a high yield is obviously desirable, it’s critical to ensure that a chunky payout doesn’t exist at the expense of reliability. In the long run, it’s the latter that matters most.

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.

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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