Setting up passive income streams does not have to be complicated, or take a lot of money to start with. One way is buying dividend shares. Here, in five steps, is how I would take that approach to try and build monthly passive income streams of £500.
1. Save money regularly
Although I would not need a huge lump sum of money upfront, to begin buying dividend shares I would need at least some capital. So I would start a habit of saving regularly.
I could do that monthly, but I think weekly would be better. Small and often would help me really get into the saving habit. That could encourage me to stick with it if some other spending priority suddenly popped up.
2. Set up a way to buy shares
Rather than stuff the money I was saving under the mattress, I would set up an account that allowed me to buy shares. This could be a share-dealing account or Stocks and Shares ISA.
I would do that as soon as I started saving. That would mean when I was ready to buy shares and found some that matched my investment objectives I could act immediately.
3. Hunt for attractive dividend shares
Not all shares pay dividends. Not even all shares that pay dividends this year will necessarily pay dividends next year — or ever again.
So how would I go about finding shares I could buy for the passive income streams they would hopefully generate in future? I would stick to industries I understood and felt I could assess. Then I would look for firms with some sort of competitive advantage that could be the source of future profits. That matters because profits are what enable a company to pay out dividends to shareholders.
Such a source of competitive advantage could be owning premium brands the way Unilever does, having patented industrial processes like polymer specialist Victrex, or owning a network that would be hard or expensive to copy, like National Grid.
4. Focus on my target
To hit monthly passive income streams of £500, how much would I need to spend on dividend shares? That depends on the average dividend yield of the shares I buy.
Yield is basically the dividend expressed as a percentage of the purchase price. So, for example, a 5% yield means I would hopefully earn £5 in dividends each year for every £100 I invested in the shares.
That £500-a-month stream adds up to £6,000 a year. To target that with 5% yields, I would need to invest £240,000 a year. I could do it with less money if I earned a higher yield, but I would always focus first on the quality of the businesses I was buying, not simply chase a high yield for its own sake.
After all, dividends are never guaranteed – and an unusually high yield can be a sign that investors are factoring in an expected dividend cut by a company.
5. Watch my passive income streams grow
However, whatever I saved each week, I could put the passive income plan into action. Even if it would take me many years or even decades to get to £500 each month, I could keep saving regularly and build up to my target over time.
