Earning passive income does not have to involve some wacky scheme of setting up an unproven business. My own approach involves investing in long-established, blue-chip FTSE 100 shares I hope can pay me dividends year after year for decades to come.
If I wanted to start doing that from scratch today with a spare few thousand pounds, here are the steps I would take.
Learn about dividend shares
Not all FTSE 100 companies reward owners of their shares by paying them cash dividends. Even those that do could stop whenever they decide.
So I would spend some time learning about how to assess whether a company looks likely to keep paying dividends and also whether its shares seem like good value.
Take the most valuable company in the FTSE 100, Shell, as an example. It announced yesterday (2 November) it would pay a dividend for the quarter 32% higher than in the same three-month period last year.
But that still leaves the payout well below where it stood before a cut in 2020.
Not only that, but the shares yield 3.2%. It means that if I spent £100 on them today, I would hopefully earn around £3.20 in dividends annually. Shell is a big company with a lot of strong energy assets. But the yield does not grab me and the company’s large dividend cut several years ago also shook my confidence in its management.
Get ready to invest
Fortunately, there are 99 other companies in the FTSE 100 I could choose to invest in, besides Shell!
I want to stick to very-high-quality companies I think have a business that can throw off lots of free cash flow. With passive income as my goal, I would focus on firms that look set to use cash flows to fund attractive dividends rather than just putting them back in the business.
So why not just stick all of my £3,000 into what I thought was the single best choice? In a word: diversification.
Even the best business can run into unexpected difficulties. That can lead to a dividend cut, or cancellation, as Shell showed.
By spreading my £3,000 over a trio of FTSE 100 firms, I would hopefully still earn some passive income even if one of them cut its dividend.
What about buying the shares? I would need some way to do that, so would set up a share-dealing account, or Stocks and Shares ISA.
Having a target
How much I earn from £3,000 depends on the average yield I glean from the shares I buy.
Imagine I managed 8%, which a number of FTSE 100 shares such as M&G and Vodafone currently exceed. That could earn me £240 a year in dividends.
That equates to around £4.60 a week. That would be useful passive income, but falls well below my target.
If I reinvested the dividends – something known as compounding – then I ought to hit my £30 weekly passive income target after 25 years.
That approach is a long-term one, but could help me set up substantial passive income streams for my initial £3,000 outlay.
