One of my favourite passive income ideas is buying blue-chip shares that can pay me dividends. That is why I own a number of FTSE shares with sizeable dividend yields, like British American Tobacco and Vodafone.
Here is an example of how I could try to build up to a four-figure annual passive income stream, for under £10 a day.
Why FTSE shares
There are lots of shares I could choose from when trying to build an income stream. But I would mainly focus on shares in a FTSE index. Specifically, I would weight my portfolio towards FTSE 100 shares.
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To get into one of these indexes, companies need to have a certain valuation. In itself that does not mean that they are a solid business (or a solid investment, which is not quite the same thing as that also involves the question of valuation). But reaching a certain size often does mean that a business has to have been doing something right commercially. So it can make sense to use that as a starting point before doing my own research to identify the right shares for me.
Whereas the FTSE 250 contains fast-growing companies like Kainos, the businesses in the FTSE 100 tend to be larger firms in mature industries. Indeed, British American and Vodafone both fit that description.
Given that passive income is my objective, that suits me fine. Mature companies that have strong cash flows and limited growth opportunities can hopefully pay meaty dividends. British American yields 7.1%, for example, while Vodafone offers 8.3%.
Building a portfolio
Both those companies also have big debt, though, which is a risk to dividends. All shares carry risks, so to help reduce the potential impact on my income streams if I invest in a company that turns out to be disappointing, I would diversify my portfolio across a number of different FTSE shares.
To choose them, I would look at the likely future income I thought I might earn from them. At a basic level, that means considering their potential profits, along with things that could stop those profits being paid out as dividends, such as debt or capital expenditure needed to keep the business profitable.
Growing passive income streams
I would then start buying those shares. To do that, I would save £9 a day in a share-dealing account or Stocks and Shares ISA.
Why £9? That would be an affordable amount for me — but could soon add up. It would give me £3,285 a year to spend on dividend shares. Investing that in FTSE companies with an average yield of 5%, for example, I should earn £164 in annual passive income.
But each year I would save more and so ought to be earning dividends both on my newly purchased shares and those I already held.
If I reinvested the dividends — something known as compounding — that could help me hit my passive income target even faster. Doing that and still presuming an average 5% dividend yield, within six years I already ought to be earning over £1,000 in dividends annually!
