There are different ways to try and earn passive income. I use one that has been proven over the course of many years: investing in a range of shares I hope can pay me dividends in future.
Doing that does not require me to have any savings to start – and I also could build up my income streams by using a fairly small amount of money on a regular basis.
Here is how I would aim to do that by using £2 each day.
Saving regularly
First I would set up a share-dealing account or Stocks and Shares ISA.
I would put the equivalent of £2 each day into it on a regular basis. I could do that dally, or may make a weekly or monthly payment.
Thay would give me around £730 each year to buy dividend shares.
Starting to earn
I would want to spread my portfolio across different companies, to reduce the impact on my passive income streams if one of them cut its dividend. Payouts are never guaranteed to last. That is why I spend time trying to find the best possible dividend shares.
The income I would likely earn from £730 depends on what dividend yield I am able to achieve.
If I could earn a 6% yield, for example, I would be set to earn almost £44 each year in dividends. If I keep up with my regular saving, I ought to build my portfolio of dividend shares over time. That could help grow my passive income streams.
On top of that I could reinvest the dividends, something known as compounding.
That would mean I would not receive the dividends as cash while I kept compounding, but it would let me grow my portfolio even quicker while still only contributing £2 per day.
Finding dividend shares to buy
To dig out the sorts of dividend shares I want, though, I would not start by thinking about yield. Instead I would look for companies I thought had solid long-term business prospects, an attractive share price, and the potential to generate enough free cash flow to pay juicy dividends.
One example I would consider buying now if I had spare cash to invest is Legal & General (LSE: LGEN).
The financial services company benefits from a well-known brand, large customer base, and proven business model. In recent years it has been consistently profitable and I think demand in the pensions market it serves is set to remain strong. That should be good for Legal & General.
One risk is a sudden crash in financial markets hurting customer enthusiasm for investment and leading Legal & General to cut its dividend. That is what happened in 2008.
But as a long-term investor I like the outlook for Legal & General in coming years and decades. I think buying it and a diversified range of shares like it now could help me earn passive income for the rest of my life.
