It can seem as if buying shares is a rich person’s game, let alone buying enough to start earning passive income from them. In fact though, it is possible to start buying shares on almost any budget.
Here, I explain how someone with a spare £3k could start investing, with an eye to building passive income streams thanks to the dividends some companies pay their shareholders.
It’s not difficult to begin investing
A lot of people plan to start buying shares at some point but do not get around to it, even when they have enough money to spare.
Why? One reason, in my opinion, is that the stock market can seem like a forbidding place to a novice.
Like many things in life though, I think breaking the process into steps can make things seem easier. As a first step, an investor could consider the best way to invest. They could compare different share-dealing accounts, Stocks and Shares ISAs and trading apps.
Another important first step towards investing is learning about how the stock markets work and the basics of being a good investor, from diversifying properly (possible with £3k) to understanding how shares are valued.
Using shares to earn passive income
Different people have their own objectives when it comes to investing. Some target growth, while others are attracted by the passive income potential of owning shares that pay dividends.
Not all shares pay dividends, even if they have in the past, but a carefully-chosen portfolio of shares can be a passive income machine.
A 6% dividend yield (well above the FTSE 100 average, but in my view achievable while sticking to blue-chip businesses) would equate to £180 a year on £3k. Or, compounded for 20 years, it could then generate over £3,800 a year!
Finding brilliant dividend shares to buy
I said I think 6% is achievable – but how? One share I think income-focused investors should consider is M&G (LSE: MNG). The FTSE 100 asset manager operates in a market that benefits from high, resilient customer demand. It has a strong brand and customer base in the millions that helps it benefit from that.
M&G’s policy is to maintain or grow its dividend per share each year. That is just a goal. In practice, no dividend can ever be guaranteed as it always depends on how a business performs.
In recent years, M&G has grown its dividend per year annually and currently the yield is 9.3%. That is among the most lucrative of any FTSE 100 share.
A good lesson when someone decides to start buying shares with the hope of earning passive income is to look to the source of that income. Here, I see risks for M&G. For example, its core business has lately seen customers withdraw more money than they put in. If that continues, it could hurt profits.
Still, as part of a diversified portfolio, I reckon M&G’s long-term income prospects make it a share investors should consider.
