Here’s how I’d try and turn £3 a day into £1,000+ of passive income

Finding the right dividend shares can lead to regular passive income. Our writer explores his top criteria and number one share right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Britvic (copyright Chris Saunders 2020)

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Right now, there are many ways of earning passive income. But my favourite method continues to be from shares. More specifically, dividend shares.

To target over a £1,000 of regular additional income, it would need some initial efforts. After which, my input could be kept to a minimum.  

To make this work, I’d buy some hand-picked dividend shares that could stand the test of time. If I pick well today, I might not need to touch them for years.

Should you invest £1,000 in Nvidia right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Nvidia made the list?

See the 6 stocks

A £1,000+ passive income stream

But can just £3 a day really be enough to earn a passive income stream? Well, it can, but here’s the thing. It’s likely to take several years to reach my goal.

Here’s how the numbers stack up. £3 a day equates to £1,095 a year. And the long-term average stock market gain has been around 8%-10% a year.

It’s not guaranteed to do the same going forward, but with over 100 years of stock market history, it’s a reasonable assumption to make.

To earn £1,000 in annual dividends, I calculate I’d need a pot worth around £12,500. And if I’m saving and investing £3 a day, it’s likely to take over eight years to get there.

It’s possible to reach my target earlier, but the investment would need to grow faster than average and/or I’d need to invest more money.

How I’d pick the best dividend shares

Some companies have a long-standing policy of distributing profits to shareholders in the form of dividends. And many have been doing so for years if not decades. My favoured income shares have a long dividend history.

Dividends are typically paid from earnings. So it’s important to have growing profits. I look for strong business models and stable income.

In addition, I search for dividend cover greater than 1.5. This important metric shows that 1.5 payouts could be made from a company’s net income. The larger this number, the better.

7.7% yield!

One dividend share that meets my criteria is international banking giant HSBC (LSE:HSBA). It currently offers a 7.7% dividend yield. This is far greater than the 3.7% the average FTSE 100 share offers.

In addition, HSBC currently has a dividend cover of 1.9 and has grown earnings by 10% a year for the past five years.

It recently announced a $0.21 special dividend following the sale of its Canadian business. This windfall pushes the forecast yield up to a whopping 10%.

Special dividends can be a nice way to boost passive income in the near term. But bear in mind this is likely to be an occasional occurrence, if not a one-off.

A long-term picture

HSBC’s pre-tax profit in 2023 surged 78% to $30.4bn, aided by climbing interest rates.

The outlook for the year ahead is mixed. Interest rates in many of its key regions have stopped rising and the next direction looks to be lower. This could negatively impact its net interest income.

But longer term, I’m still positive on this Asia-focused lender. Its global footprint makes it well-positioned to benefit from faster growing regions around the world. Overall, this is exactly the kind of dividend share I’d be looking for to earn regular passive income.

Should you invest £1,000 in Nvidia right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Nvidia made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Just released: our 3 top small-cap stocks to consider buying in April [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

Here’s why Tesla stock just rocketed 22.7%! Is it time to buy?

This writer wonders whether the news that sent Tesla stock soaring yesterday is a true gamechanger for the electric vehicle…

Read more »

Investing Articles

2 quality UK stocks to consider buying as share prices rally

With UK stocks moving higher, it might look as though investors with cash on hand have missed their chance. But…

Read more »

Investing Articles

How much £10,000 invested in Lloyds shares is forecast to be worth in 12 months

Harvey Jones is looking past today's stock market volatility to see where Lloyds shares may stand in a year's time.…

Read more »

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »