Earning passive income would let me get more money without having to work for it. This may sounds fanciful, but a lot of people already achieve it.
One common way to earn passive income is to invest in shares of large companies like Microsoft or Tesco and hope to earn dividends from them.
This approach does not require a lot of money. So here is how I would put it to use if I had a spare £3 a day.
Regular saving
My first move would simply be to make sure I stuck to my daily goal of setting aside £3 to invest.
To that end, I would set up a share-dealing account, or a Stocks and Shares ISA.
That way, I would have the money on hand ready to invest as soon as I decided what shares looked appealing.
Hunting for income
But many shares do not pay dividends and even those that do can stop.
Given that dividends are core to my passive income plan, how could I hunt for shares that might give me what I want?
I would look for businesses I think could generate sizeable cash flows. For example, if a company operates in a large market and has a competitive advantage, it should be able to do that (Coca-Cola is an example).
But cash flows and free cash flows are different. Sometimes, for example, a company has a lot of debt. It may use its profits to service that, instead of paying them out to shareholders. So I look at a firm’s balance sheet and try to choose firms I think could be free cash flow machines in future.
Valuation matters
Other investors may feel the same way though, pushing up the price of the shares.
That could hurt my passive income prospects, as the more I pay for a share the lower its dividend yield becomes (yield is a company’s annual dividend as a percentage of my purchase price).
It could also mean that the shares lose value over time. Although dividends are my focus, I would also be careful to try and reduce the risk of capital loss.
So having identified some possible shares to buy, I would always consider whether they are attractively valued before buying them.
I would invest across a range of shares to keep my portfolio diversified. If one of my choices performs poorly, that would reduce the overall impact on my portfolio.
Earning passive income
If I could earn an average dividend yield of 5%, for example, saving £3 a day would give me £1,095 a year – that ought to generate almost £55 in dividends annually.
Remember, that is from only one year’s saving. In subsequent years, I could buy more shares and hopefully earn further dividends, while still getting dividends from shares I had bought beforehand.
In fact, investing just a few pounds a day in carefully chosen shares, I could aim to set up passive income streams for the rest of my life.
