The idea of earning money without having to work sounds great. But it’s not just a fantasy – this really is what a lot of people do every day. This money people earn without working for it is called “passive income”. With even a little bit of money put to work, anyone can start earning a passive income.
Even if you don’t have any savings, putting aside a little of your daily budget can allow you to build up a small nest egg. By investing that in shares that pay dividends, you will be able to earn a passive income. Over time, you may even see capital appreciation on the nest egg.
How I’d save for a passive income
Saving a large amount can seem difficult to achieve. I find it easier to break it down to a daily sum. Saving just £3 each day, around the cost of a sandwich, would already add up to an impressive £1,085 each year. Whether physically putting three pound coins aside each day or setting up a regular bank transfer, I’d move the amount monthly into a share-dealing account. That way, I wouldn’t be tempted to spend it. I would look for a cost-effective option such as a self-invested ISA with low costs and low dealing charges. As my savings grew, I would invest them into shares that could start generating passive income.
Depending on the account, buying shares might attract commission. So until my savings grew, I would focus on just one or two shares, to minimise my dealing costs.
Two shares I’d pick today
Getting the right shares is important. Not all shares reliably pay out a dividend so I wouldn’t just look for today’s highest yielding shares. I would focus on shares that meet certain criteria when generating passive income. Are the companies relatively stable? Do they tend to pay out a dividend even when the economy is in a downturn? Is the dividend high enough that it will offer me an attractive passive income?
Using those criteria, two companies stand out to me. The first is Diageo. The drinks giant behind such brands as Guinness and Johnnie Walker has paid out dividends without a break for over 30 years. Currently the yield is 2.4%, so for every £100 of sandwich money invested instead, the dividend payout would be £2.40 a year. My second choice would be the tobacco company Imperial Brands. This manufacturer of brands such as Lambert & Butler and Rizla has also paid dividends each year for decades. Even after a dividend cut this year, it still has a yield of 10.2%.
Passive income for the price of a daily sandwich
£1,095 split evenly across those two shares would produce around £69 of passive income next year. That money would be mine without me having to do anything to earn it. I also expect those shares would likely keep paying out passive income year after year in decades to come. For the cost of just one sandwich each day, I could easily start building a passive income today.
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Christopher Ruane has shares in Imperial Brands. The Motley Fool UK has recommended Diageo and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.