The idea of passive income is simple. Earn money without working for it. The reality can also be fairly simple, in my view. By putting money regularly into income shares, I could sit back and, hopefully, earn dividends without needing to lift a finger.
I do not even need money saved up to begin. Here is how I could put this plan into action for £5 a day, starting today.
Saving money regularly
Putting aside £5 a day would help me build up some capital that I could use to invest. Over the course of a year, that adds up to £1,825. It is a decent pot of money I would be able to put to work in my hunt for dividends.
I would save the money in a share-dealing account, or Stocks and Shares ISA. That way, I would be ready to invest it as soon as I identified some shares that suited my investment objectives.
Finding income shares to buy
The core of my passive income plan is earning dividends so it might sound understandable if I now went hunting for shares with juicy dividends.
But, in fact, that is not the next step I would take.
Dividends are never guaranteed and even a long-time payer can cut its payout. For example, in 2020, I owned Shell shares when the oil major cut its dividend for the first time since the war.
Going to the source
So rather than focus on the size of dividends, I first look at what I see as the source of dividends. Consistent surplus cash generation. If a company keeps throwing off cash it does not want or need in its business, it can be used to fund shareholder payouts.
To generate such cash, it helps if a company operates in a business area that should benefit from strong customer demand. I also look for a firm to have a competitive advantage that sets it apart from rivals. That helps give it pricing power, potentially enabling it to achieve attractive profit margins that could support dividends.
Buying income shares
Next, I would start to build a portfolio of such shares, if I thought they were available to me at an attractive price.
The reason for a portfolio is simple. Diversification. No matter how great one share may seem, the unexpected can happen. So I would spread my money across a variety of stocks.
Passive income flows
Doing this, if I managed to invest in shares with an average dividend yield of 5%, I ought to earn just over £90 in annual passive income from my first year’s daily savings.
If I kept those shares and the dividends continued, I could keep earning money from them for decades. Meanwhile, if I kept on saving £5 a day, I would have more capital to put into additional shares.
Over time, sticking to my plan of action, hopefully I could build lifelong and growing passive income streams.
