Some passive income ideas can be lucrative but need a lot of money upfront before they can get going. Investing in shares is different. It lets me generate passive income but without needing to save up large sums of money first.
In fact, I could begin with no savings, by putting aside a fairly modest sum to invest on a regular basis.
Here is an example of how I would do that, by using £20 a week.
Save over £1,000 per year
While £20 each week may not sound like much, it soon adds up.
Within one year, putting aside money consistently at that rate would mean I had an investment fund of over £1,000 at my disposal.
That would be more than enough to put my passive income plan into action by buying dividend shares. First, though, I would open either a share-dealing account or Stocks and Shares ISA. I could use that to invest the money when ready.
Building passive income streams
Central to my plan are dividends. Those are like a small share of profits a company gives to the owner of a share.
They are never guaranteed, even from a business that has paid them out before. So I would spread my money over a few different shares. I would also focus on what I thought were the dividend prospects for each company, instead of just looking at their track records.
If I could achieve an average 5% dividend yield, my first year of saving alone ought to generate £52 in annual passive income.
Choosing shares to buy
How could I know what dividends a company might pay in future?
Some firms set out their dividend plan. But it is only a plan – payouts are never guaranteed. So I would look for firms with a sustainable competitive advantage in an area I felt was likely to see resilient customer demand. For example, I think supermarket Tesco and retailer Games Workshop fit the bill.
On its own, though, that is still not enough in my view. I also consider the price of a share when buying it. Not only am I wary of overpaying — the price I pay also affects the yield I could expect.
Putting the plan into action
By doing that, over time I could hopefully build a sizeable and growing portfolio of shares I hoped would pay me dividends.
Once I own a share, I am entitled to any dividend paid by the company until I sell it. So by investing in a cross-section of promising companies, hopefully my passive income streams would continue for many decades.
Indeed, if I keep saving money and carefully choose the businesses in which I invest, hopefully the income I generate each year from putting money regularly into shares could grow.
