Instead of spending a fiver a day on a fancy coffee, what sort of passive income might you earn if you put it into dividend shares?
The answer could be more than you think!
Taking a long-term approach to wealth creation
The key is time. A fiver a day may not sound like much, but if could add up to a lot – depending on how many days are involved!
Over a year, for example, £5 a day would add up to £1,825. Over a decade, it would come to over £18,000.
But simply saving the money might not be enough to generate passive income unless, for example, it earned interest. One way to try and earn passive income would be to put it into shares that pay dividends.
Never look a gift horse in the mouth
Not all shares pay dividends, even if they have done so in the past.
Basically a dividend is money a company pays out to shareholders because it generates more cash than it needs to run its business. Why do they do that? One reason can be to make owning the shares more attractive for potential investors.
From a passive income perspective, this could be a lucrative opportunity to investigate.
Using dividends to earn more dividends
Going back to the example above, what if that £5 a day was drip fed into shares with an average dividend yield of 6% (meaning that every £100 spent on them ought to generate £6 a year of annual income)?
Doing that, reinvesting dividends along the way ought to create a portfolio worth over £24k after a decade. At a 6% dividend yield, that should generate around £1,443 of passive income yearly – nearly £28 a week.
What I look for when buying dividend shares
Is a 6% yield possible? It is almost double the current FTSE 100 yield of 3.1%, but I do see it as feasible even while sticking to high-quality shares.
Remember I said above that dividends are what a company may pay when it has spare cash. So when hunting for income shares to buy, I look for proven business models I believe have long-term cash generation potential.
One share to consider in today’s market
With a 6.1% yield, Aviva (LSE: AV) is the sort of company I have in mind – and one I think is worth consideration for its passive income potential.
Aviva demonstrates that no dividend is ever guaranteed, having cut its own sharply in 2020. Since then though, the payout has been climbing steadily.
As the country’s leading general insurer, Aviva benefits from economies of scale. That large customer base means it can also try to sell more products to existing customers, something it is already successfully doing with millions of them.
Being so large in one market brings the risk that competitors may try to steal Aviva’s lunch. That could hurt profit margins.
But over the long run, I see this as a proven business in a resilient industry that benefits from economies of scale and a cash generative business model.
