Here’s how I’d try and turn £3 a day into £1,000+ of passive income

Finding the right dividend shares can lead to regular passive income. Our writer explores his top criteria and number one share right now.

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Image source: Britvic (copyright Chris Saunders 2020)

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Right now, there are many ways of earning passive income. But my favourite method continues to be from shares. More specifically, dividend shares.

To target over a £1,000 of regular additional income, it would need some initial efforts. After which, my input could be kept to a minimum.  

To make this work, I’d buy some hand-picked dividend shares that could stand the test of time. If I pick well today, I might not need to touch them for years.

A £1,000+ passive income stream

But can just £3 a day really be enough to earn a passive income stream? Well, it can, but here’s the thing. It’s likely to take several years to reach my goal.

Here’s how the numbers stack up. £3 a day equates to £1,095 a year. And the long-term average stock market gain has been around 8%-10% a year.

It’s not guaranteed to do the same going forward, but with over 100 years of stock market history, it’s a reasonable assumption to make.

To earn £1,000 in annual dividends, I calculate I’d need a pot worth around £12,500. And if I’m saving and investing £3 a day, it’s likely to take over eight years to get there.

It’s possible to reach my target earlier, but the investment would need to grow faster than average and/or I’d need to invest more money.

How I’d pick the best dividend shares

Some companies have a long-standing policy of distributing profits to shareholders in the form of dividends. And many have been doing so for years if not decades. My favoured income shares have a long dividend history.

Dividends are typically paid from earnings. So it’s important to have growing profits. I look for strong business models and stable income.

In addition, I search for dividend cover greater than 1.5. This important metric shows that 1.5 payouts could be made from a company’s net income. The larger this number, the better.

7.7% yield!

One dividend share that meets my criteria is international banking giant HSBC (LSE:HSBA). It currently offers a 7.7% dividend yield. This is far greater than the 3.7% the average FTSE 100 share offers.

In addition, HSBC currently has a dividend cover of 1.9 and has grown earnings by 10% a year for the past five years.

It recently announced a $0.21 special dividend following the sale of its Canadian business. This windfall pushes the forecast yield up to a whopping 10%.

Special dividends can be a nice way to boost passive income in the near term. But bear in mind this is likely to be an occasional occurrence, if not a one-off.

A long-term picture

HSBC’s pre-tax profit in 2023 surged 78% to $30.4bn, aided by climbing interest rates.

The outlook for the year ahead is mixed. Interest rates in many of its key regions have stopped rising and the next direction looks to be lower. This could negatively impact its net interest income.

But longer term, I’m still positive on this Asia-focused lender. Its global footprint makes it well-positioned to benefit from faster growing regions around the world. Overall, this is exactly the kind of dividend share I’d be looking for to earn regular 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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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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