Passive income is money that comes in without having to work for it.
From dividends to online sales royalties, passive income can be a helpful source of extra funds. I really think it’s possible to start earning passive income without doing much if any work. Having money to start with would help. But even starting with no money, putting aside just one pound a day could start to build passive income streams.
Below I explain how I’d put that approach into action.
Saving funds to invest
Putting aside a pound a day, I’d build up an investment pot. This could be invested in shares. This pot would grow slowly at first. But the key thing is that even small daily contributions mean it would indeed grow.
It would likely take a few months before there was enough capital to start investing efficiently. I’d want to minimize my risk if I was starting with a single company. So, I’d concentrate on blue chip names. For example, National Grid is an energy company. As its name suggests, National Grid owns a large part of Britain’s electricity transmission infrastructure.
Its shares yield 5.6%. So just over three months into saving £1 a day, let’s say I’d amassed £100. Putting that into National Grid shares, I’d hope to earn £5.60 in passive income each year.
That doesn’t sound like a lot. But I’d remember a couple of things. First, the dividends would hopefully keep coming in. So, that passive income stream might continue each year just from my initial investment. It could even increase over time, although utility dividend rises tend to be regulated. Note that dividends come from cash flows, so are never guaranteed. If grid operation costs unexpectedly push the company into a loss, for example, it could suspend dividends.
Secondly, I would now own the shares. So at some stage in the future, I could sell them again. If the price had fallen, I might make less than I paid. But if the share price had risen, I could recoup more than the initial £100 outlay. The passive income during my holding period would be a sort of bonus.
Higher yield for passive income
Within a few months more, just £1 a day would let me start to diversify my holdings. I would do this because diversifying across companies is a way to reduce risk.
For example, tobacco company Imperial Brands is yielding 9.3%. So putting my next £100 into that would provide close to a double-digit return in passive income. Cigarette sales are under threat from falls in demand and regulatory controls, though, so I would try to keep diversifying.
At the moment I quite like Tesco for its yield of 5.1%. Changes in the retail market could affect its success. But I do see some defensive qualities in its brand name and customer relationships.
In less than a year, on just a pound a day, I’d own three blue chip names, with a projected passive income of £20 each year, based on current prices.
That’s just the beginning. If I kept saving, as well as holding these shares and collecting future passive income, I could buy more. Or I could find new companies in which to invest, to try to build my passive income stream more and more over time. All on a pound a day!
christopherruane owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Tesco. 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.