Here’s how I’d start making powerful passive income from scratch

This Fool plans to generate passive income from buying dividend shares. He details how he’d do it today if he were starting from zero.

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Having multiple streams of passive income is the dream for millions of investors. There are plenty of ways to achieve this. I could start a business or buy property. But I think the easiest way to start out is by buying dividend shares.

Famous investor Warren Buffett once said: “If you don’t find a way to make money while you sleep, you will work until you die.” That’s a mantra that’s driven most of my investment decisions.

During my time investing, I’ve slowly been building up my nest egg. In the years to come, I’m confident that it’ll provide me with a solid source of passive income.

If I were starting from scratch today, here’s what I’d do.

Consistency is key

Before we delve into what sort of companies to target, there is one tip that I deem to be imperative. That’s to invest on a regular basis.

This can be difficult, and life can get in the way. Unexpected outgoings crop up all the time. And it’s smart to have an emergency fund for times like this. However, by choosing a select amount, say £200 a month, and ensuring that I invest that every month, I know I’ll be able to achieve my goals more quickly.

Investing regularly provides so many benefits. For example, by doing so, I’m pound-cost averaging. This means by drip-feeding my money into the stock market, I’m not trying to time the market. As they say, time in the market beats timing the market.

With that in mind, by investing regularly I can also benefit from compounding. This means I’ll be earning interest on my investments as well as the extra money I make.  

Buying the best

Next up is to select the right company. Plenty of businesses offer handsome dividend yields. But I need to do my due diligence. I don’t want to invest in a company only for it to cut or halt its dividends down the line. After all, dividend payments are never guaranteed.

With that, a smart option I already own is Legal & General (LSE: LGEN). As I write, it yields 8.2%. That’s superior to the FTSE 100 average of 3.9%.

The industry that Legal & General operates within has been under severe pressure in the last few years. As such, the stock has taken a wobble. Assets under management have fallen. A high cost of living could continue to see customers veer away from investing their cash.

However, I think the business will remain a stalwart in my portfolio for the years to come. Firstly, Legal & General’s dividend has grown by over 70% in the last decade. This shows the firm’s willingness to return value to shareholders.

On top of that, I think the company is well-placed to excel in the times ahead, especially when you consider factors such as an ageing demographic.

To add to all that, it also looks cheap to me, trading on just 6.9 times earnings. And while diversification is key, it’s companies such as Legal & General that I’ll continue to target to create powerful passive income.

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.

Charlie Keough has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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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