A Bank Holiday can provide a welcome dose of leisure time. While many of us need to wait until we retire to enjoy regular, long stretches of leisure time, I think passive income could be a way to help bring retirement forward. I could hopefully do that with the help of just a modest daily sum now. Here is a passive income plan I could use for a fiver a day.
Dividend shares as passive income ideas
The core of my idea is putting aside a bit of money each day to invest in dividend shares. I like dividend shares as passive income ideas because I can benefit from the profits made by large companies with strong businesses.
I do not need to do any work myself. Instead, I can simply put my money into their shares and hope to receive dividend payments from them in future.
Choosing dividend shares to buy
Not all companies pay dividends. Nor will all companies that pay a dividend now necessarily pay one in future. That will depend on their business results and management priorities.
That affects my approach in a couple of ways. First, I need to diversify across shares in different businesses. Second, I need to find shares to buy that I reckon could pay future dividends at their current level or higher.
I do that by focussing on a company’s business model. Is there something about it that could enable it to make profits year after year? For example, is it uniquely well-placed to meet customers’ needs, like Victrex with its patented polymer technology? Does it own strong brands that consumers are willing to pay a price premium for, like Guinness-owner Diageo?
If I can find companies with strong potential sources of future profit that trade at an attractive share price, they might be a good fit for my portfolio of shares.
The £5-a-day plan
Putting £5 a day into a share-dealing account or Stocks and Shares ISA would give me around £1,825 a year to invest. If I could put that into shares with an average dividend yield of 5%, that ought to earn me roughly £91 a year of dividend income.
In itself, that might not be much. But the longer I stick with my plan, the bigger the possible income streams. For example, if I kept investing £5 a day in shares with an average 5% yield and reinvested my dividends along the way, after 10 years I should have around £12,650 worth of shares generating annual dividend income of roughly £630. After 25 years, my portfolio would be worth roughly £48,500. That could generate annual passive income of over £2,400.
These calculations presume that share prices are static. Over 25 years that is unlikely. They could go down. Then again, if I invest in high-quality companies with strong income potential then, hopefully, they may go up. That could increase the value of my portfolio further.
With a lump sum saved and regular passive income from dividends, I could hope to bring my retirement forward. I could put the plan into action today, with just £5.
