Ever thought about putting aside a few pounds each day to buy dividend shares and try to build up some passive income streams?
It is an approach that can work. It does not even need a lump sum of cash, or large contributions.
Matching the approach to your own situation
Say someone chooses to put aside £3 a day. It may not sound like much, but over time things can build up. That £3 a day would add up to £1,095 in a year.
It is possible to invest more, of course, and hopefully earn more passive income.
Indeed, one thing I like about owning dividend shares as a way to generate income is just such flexibility of the approach. It can be adapted to suit each person’s own circumstances.
Setting up a way to buy shares
When I talk about putting aside a few pounds a day, dropping some coins in a jar could work fine as a place to start (and could be a good visual reminder to put in some money each day).
But a coin jar alone will not work when it comes to actually buying shares!
So a practical move would be hunting around for a good option when it comes to share-dealing accounts, Stocks and Shares ISAs, and trading apps.
Understanding the economics of income shares
Not all businesses pay dividends, even when they are profitable and have done so in the past.
That is why savvy investors keep their portfolio diversified across a range of companies.
They also look carefully when deciding what shares to buy. How likely does a company look to pay dividends in future and at what level? How attractive is its current share price?
The FTSE 100 currently yields 2.9%. That means that £100 invested today ought to generate £2.90 per year in dividends.
How much might such an approach earn?
I think in the current market an investor could realistically target a 6% yield (£6 of passive income annually for each £100 invested), while sticking to high-quality companies.
6% of £1,095 is around £66. So, £3 a day for a year invested at a 6% yield could generate £66 of passive income annually.
But things can get more lucrative over time.
Say someone invests £3 a day for 10 years, reinvesting (compounding) dividends. Compounded at 6% annually, that would mean the portfolio should be worth over £14,800.
At a 6% dividend yield, that could earn passive income of some £890 annually.
On the hunt for income shares to buy…
One share I think investors should consider for its passive income potential is ITV (LSE: ITV).
The FTSE 250 company is a household name. Traditional television is in decline – a risk to future advertising revenues for the firm – but it remains a sizeable business and ITV has a strong position.
Meanwhile, ITV has been busily building up its own digital offering.
There is another side to the company, too. Not only does it broadcast, it also has a studio rental and production business.
The company aims to pay an ordinary dividend of 5p per share annually. Currently, ITV shares yield 6.1%.
One risk to profits is reduced advertising demand. That saw ITV’s advertising revenues fall in the most recent quarter, though it identified cost savings to help mitigate the impact.
