Earning money without work is known as passive income. That may sound like an improbable idea – but people get such income every day. Some rent out property. Others benefit from royalties.
My own approach involves investing in shares I hope can pay me dividends in future. That does not require me to have any cash upfront – nor do I necessarily need to invest large amounts of money. Here is how I would aim to do it from a standing start, for the princely sum of £3 a day.
Building a capital base
To invest I will need some capital. Putting money aside on a regular basis can help me to build that from scratch.
The amount ought to be something that I can afford, based on my own financial circumstances. Everyone’s situation is different. But whatever I decide, I would try to get into a habit of regular saving.
To do that, I would drip-feed the money into a share-dealing account, or Stocks and Shares ISA.
Understanding dividend yield
Doing that ought to mean I have just under £1,100 per year to invest.
How much passive income could that earn me? The answer to that question depends on what dividend yield I can generate. Yield is basically my annual dividends as a percentage of what I spent on the shares. If I can achieve a 5% yield, my first year’s saving ought to earn me around £55 annually once invested.
That might not sound huge – but it is a start. For as long as I hold the shares, I would receive any dividends they paid. So, over time, my passive income streams ought to grow as I should still be receiving dividends from shares I had previously bought as well as newer investments.
Finding shares to buy
Some shares have a much higher dividend yield. For example, Diversified Energy has a 14% yield.
So would I just buy the highest-yielding shares to try and maximise my passive income? Definitely not! Dividends are never guaranteed. A company can cancel its dividend at any moment. Not only could that lead to my passive income falling, but the value of my investment could also tumble if investors mark a share down after the dividend is cancelled.
What I look for is great businesses that sell at an attractive share price. Only then do I consider their yield.
An example
Putting this theory into action, I might consider buying a share like Unilever for its passive income potential.
The company owns unique brands. That is a competitive advantage and gives it what is known as pricing power, meaning it is not in a race to the bottom when it comes to competing on price alone. That could help the consumer goods giant make profits and fund a dividend, perhaps far into the future.
Unilever shares currently yield 3.5%. But there are risks to any share. For example, cost inflation may eat into profit margins at Unilever. So even if investing only £3 a day, I would never put all my eggs in one basket. Instead I would diversify across a range of businesses.
