One of the best ways to start earning a passive income in the stock market is by investing in dividend shares. These businesses are typically mature, established enterprises. And while that usually translates into boring, low-growth ventures, the stable and consistent cash flow generation paves the way for juicy shareholder payouts.
Since these stocks often don’t trade at lofty multiples, having even a small amount of capital, say £5 a day, is enough to get the ball rolling.
Crunching the numbers
Consistently drip feeding money into the stock market’s a good wealth-building habit to get into. However, since there are transaction fees on each trade, it’s wiser to use a high-interest savings account until a more substantial pile of capital has accumulated.
After a month of putting aside £5 each day, an investor will have around £150 of capital to work with – a nice lump sum. So the question now becomes, where should this money be invested?
One of the easiest ways to deploy money in the financial markets is with an index fund. The FTSE 100‘s a terrific destination for passive income-seeking investors, with its dividend yields usually between 3% and 4%. Right now, it’s around 3.4%, and when combined with capital gains, investors have historically earned a total annual return of around 8%.
Investing £150 every month for 10 years at this rate translates into a portfolio worth around £27,400. At a 3.4% yield, that’s enough to generate a passive income of £932 a year. But for those patient enough to wait 20 years could see their nest egg almost triple to £88,350 or an income of £3,004.
Earning an extra three grand each year without having to work for it sounds delightful. But obviously it’s not a life-changing sum. So what can investors do to earn even more without having to wait longer or put in more money?
Focus on the winners
Index funds are great for investors seeking to put their portfolios on autopilot. But using this passive investing strategy also closes the door to market-beating returns. That’s where stock picking enters the picture.
By investing in individual companies, we can focus solely on winners. Take Safestore Holdings (LSE:SAFE) as an example.
Between 2009 and 2025, the self-storage enterprise evolved from a tiny operation into an industry titan, capturing the lion’s share of the British market. That’s translated into a 16.8% average annualised return. Investing £300 a month at this rate for 20 years is enough to grow a portfolio to almost £300,000. And by withdrawing 4% of this each year, that’s a passive income of £12,000!
Of course, there have been plenty of other UK stocks that haven’t come close to delivering this sort of return. Safestore benefited massively from the reduced interest rate environment that followed the 2008 financial crisis, allowing it to expand at a relatively low cost.
Today, interest rates are once again falling but are still elevated, causing Safestore’s performance to suffer compared to what it’s historically achieved. Nevertheless, its free cash flow generation remains intact, paving the way for a higher dividend, with its yield now at 4.9%. As such, this dividend stock may still be worth a closer look for investors seeking a chunky long-term passive income.
