Passive income plans come in all shapes and sizes. Do they work?
Some do, some do not. But what strikes me is that some such plans are not actually passive. In fact, they can involve quite a bit of time and effort.
By contrast, my approach to earning passive income is indeed passive. Not only that, but it could be very lucrative over time.
With a spare £5 a day, here is how I would put it into action.
Buying into a profitable business, instead of starting one
A lot of passive income plans involve setting up a business. That can involve risks and may end up generating a loss, not income. By contrast, buying shares in proven blue-chip FTSE 100 companies can mean that I immediately own a stake in a business that is already generating large profits.
Take Unilever (LSE: ULVR) as an example. The maker of Marmite and Domestos is a money spinner that currently makes billions of pounds annually – and pays dividends every three months to anyone who owns its shares.
Building a share portfolio for income
Things might not always stay that way, of course. Unilever could run into problems that hurt its profitability, such as cost inflation.
I think its premium brands and unique products might help it pass such price rises onto customers. Still, I do not know. Indeed, that is why I keep my portfolio diversified – and always consider risks as well as potential rewards when buying shares.
By building a portfolio of different blue-chip businesses with proven commercial models, I could be earning passive income in a matter of months or even weeks, rather than waiting for some speculative business idea to take off.
Earning more over time
My first move would be to set up a share-dealing account or Stocks and Shares ISA.
Putting aside £5 a day would give me over £1,800 a year to invest. As the years go by, my regular contributions should mean I have more funds available to invest.
On top of that, I could opt to reinvest my dividends rather than take them as cash. That could boost my passive income streams over the long term if I was willing to wait to start earning.
Growing income streams
At the moment, Unilever has a dividend yield of 3.7%. That means that, for every £100 I invested, I would hopefully earn £3.70 in dividends annually.
If I put my £5 a day into a portfolio of shares with an average yield of 3.7% and compounded the dividends, after five years I ought to be earning around £370 in passive income annually.
If I could manage a higher yield while sticking to blue-chip shares – say 7% — then the same approach ought to be generating £758 a year after five years. After 10 years though, my annual passive income would top £1,800. After 15 years, it could be over £3,300 a year. Seven percent may sound ambitious, but quite a few blue-chip FTSE 100 shares currently have yields at that level or above including some I would (and do) happily own.
As we can see, a long timeframe, patience and relentless focus on investing in high-quality shares at attractive valuations could help me generate thousands of pounds annually in passive income.
