Earning more money without working extra hours certainly sounds appealing. Different people try to earn such passive income in various ways, some of which are more attractive to me than others. My own approach is to invest in shares that I hope will pay me dividends.
Something I like about that approach when compared to other passive income ideas is that I do not need any funds upfront. Here is how I could put such a plan into action by putting aside £5 a day.
Build a bank of seeds to sow
In everyday life, £5 does not typically go very far, unfortunately.
But putting aside that amount each day means that over time, I can build an investment nest egg. In a year, saving £5 a day would add up to over £1,800.
I would put the money directly into a share-dealing account or Stocks and Shares ISA. That way, once I start finding dividend shares I want to buy, I would be ready to take action immediately. I would want to spread my investments, as diversifying could reduce my risk should a single share perform worse than I expect.
Hunt for great dividend payers
As dividends are the cornerstone of my passive income plan, I would want to find a range of great dividend payers in which to invest.
But how would I know what to look for? After all, just because a business has paid generous dividends in the past does not mean it will keep paying out in the future. Dividends are never guaranteed. So I would go back to basics and consider what a dividend is. It is basically a way for a company to divvy up excess profits among shareholders.
I would therefore look for companies I thought could generate substantial profits in years to come and would not need to reinvest them all to keep the business competitive.
Is it hard to find such companies? I do not think so. After all, if the company has such a great business with strong prospects, it may already be large and well-known, like Nike or Unilever.
But many other investors are also hunting for such companies, which can push their share prices up. That is why I do not just look to buy into great companies but hunt for those with shares that are attractively priced.
Price and dividend yield
Price matters for a variety of reasons. But from a passive income perspective, an important one is yield. Dividend yield is the income I expect to earn each year as a percentage of what I invest. For example, if I invest the first year’s savings of £1,825 at a 5% dividend yield, I will hopefully earn over £90 in annual passive income.
As a share price moves up, the prospective dividend yield for a new buyer falls. So when looking at shares to buy as part of my passive income plan, I do not just want to identify great businesses. I would also want to buy into them when they trade at an attractive share price.
The post How I’d build passive income streams for life – on £5 a day appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Nike and Unilever Plc. 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.