Passive income ideas come in all sorts of shapes and sizes. One approach is to try and generate new income sources by setting up a business.
But there are already loads of blue-chip companies with proven business models that are generating large income streams. Many distribute some of that income to shareholders in the form of dividends.
We are not talking small numbers here either. On average, FTSE 100 firms alone distribute over £1bn each week to shareholders as dividends.
There can be a lot of shareholders and some have very large holdings. Still, even a small slice of that weekly £1bn could be a very handy passive income source!
Fortunately, tapping into the dividend gusher does not even require a lot of money. Someone with no savings and no stock market experience could start putting aside a fiver each day to invest in dividend shares and build towards a four figure annual passive income.
Here’s how.
Simple maths, but powerful results
Say that money is invested in a diversified portfolio of carefully chosen blue-chip shares, with an average dividend yield of 6%.
Initially, those dividends are reinvested rather than taken out as income, compounding their value.
Doing that, in less than seven years, the portfolio will be big enough that a 6% dividend yield would produce passive income in excess of £1,000 a year.
Getting ready to invest
Regular saving can be a powerful habit and investing then re-investing the dividends could be a lucrative passive income idea.
But the idea on its own earns nothing – it need to be put into practice.
So a practical first step during this bank holiday weekend would be for an investor to spend some spare time comparing different share-dealing accounts, Stocks and Shares ISAs and share-dealing apps as they decide which one seems most suitable for their own circumstances.
Finding the right dividend shares to buy
Is a 6% yield realistic? It is well above the FTSE average, but I do think it is feasible.
For starters, the total compound annual return can be made up of share price moves as well as dividends (minus ISA costs and fees, which is why I mentioned making a smart choice in that regard).
One share I think investors should consider with a yield that beats that goal is insurer Aviva (LSE: AV). It yields 6.3% at the current share price.
Insurance is not new or exciting as a business. From a passive income perspective, that is why I like it. Customer demand is resilient and the business model is proven.
That is true of Aviva specifically. It has focused on its home UK market more in recent years than before and now has more UK customers than any other insurer. Its planned acquisition of Direct Line could extend that advantage, offering economies of scale.
Dividends are never guaranteed at any company. Aviva cut its payout per share in 2020 and I see a risk that a weak UK economy could lead to rivals trying to woo customers by cutting prices, hurting profitability across the insurance sector, especially for the market leader given its size.
From a long-term perspective though, I see Aviva as a strong business in an enduring sector.
