There is a world of passive income ideas out there, from the lucrative to the lunatic. One idea to generate unearned income is dropshipping, which basically involves reselling goods so one does not have to hold stock or fulfil orders directly.
That sounds well and good in theory. But in practice I think dropshipping might not be that passive. After all, one still needs to generate a customer base and manage the business. To generate passive income, I prefer to invest in shares that will hopefully pay me dividends.
I like that approach because it is genuinely passive and I can benefit from the expertise of proven businesses without having to reinvent the wheel myself. On top of that, I do not need any money upfront.
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Saving money to invest
But if I do need money upfront, what can I use to buy dividend share?
The answer is that I would put some cash aside on a regular basis in a share-dealing account or Stocks and Shares ISA, then use that to invest.
The amount I save depends on my own financial circumstances, but I think it helps to aim for a realistic target that I am likely to be able to achieve. Just £5 each day would give me an annual investment pot totalling £1,825.
Opportunities and disappointments
There are some brilliant dividend shares out there. But there are also terrible ones.
“Terrible” here might not just mean that the shares do not pay dividends or cancel them in future, which is always a risk. It can also describe a situation where I pay for a share, only to see its value drop considerably.
In such a scenario, even if I earn dividends from it, I may still lose money if I decide to sell the stock in the future. That is not always my choice: for example, a takeover bid may end up forcing me to accept far less for a share than I paid for it.
Learning how the stock market works
All investors make mistakes. But by learning more about the stock market, hopefully I can improve my overall ratio of brilliant investments to terrible ones. With passive income as my goal, I try to learn as much as possible about dividends. How are they funded and how can I tell whether they are likely to rise, fall or stay the same at a given company?
For example, Unilever has a dividend yield of 3.5% while Legal & General offers 7.3%. Does that mean the insurer is over twice as good a choice for me from a passive income perspective as the Dove maker? Not necessarily!
By learning about dividends, share valuation and how to read company accounts, I should become a better informed investor.
Setting up passive income streams
With that knowledge, I can then choose specific shares to buy because I think they have attractive income prospects.
How much might I realistically earn in passive income? It depends on the average yield of the shares I buy with my £1,825 each year. Putting that much into a diversified portfolio of shares offering a 7.3% yield like Legal & General could hopefully earn me £133 in dividends annually.
Over time, those streams may keep growing as I continue to save.
