£10 a week might not go far in many areas of life. But when it comes to passive income, I think £10 a week could make a difference to me. A tenner a week is enough to start building long-lasting passive income streams, in my view. Here’s how.
Passive income for £10 a week
There are a couple of reasons I think £10 a week is a sufficient amount to invest in income-generating dividend shares.
First, over the course of a year, £10 each week adds up to more than £500. For a comparatively small regular outlay, that’s a reasonable capital sum with which to invest.
Second is the power of compounding. Let’s say that I invest in dividend shares with an average 5% yield. Over one year, 5% of £520 is £26. But if I reinvest the dividends each year, after five years I would be looking at a capital pile of £638. Still at 5%, that would be generating around £32 a year in passive income. Remember, that’s just from my first year of weekly savings. After five years, I’d expect a lot more income because I’d also hopefully be getting income from the money I put aside in years two to five. Over the long term, I reckon £10 a week can help me generate meaningful passive income.
Is this income guaranteed?
In my example before, I assumed a yield of 5%. But is that realistic?
Certainly there are a number of FTSE 100 companies offering dividend yields of 5% or above. Those include well-known names such as Vodafone and Legal & General. But dividends are never guaranteed. Lower profits or a downturn in business can lead a company to cut its dividend, as Vodafone did several years ago.
That’s why I seek to diversify my passive income streams across different companies and business sectors. £520 a year is enough to let me spread my portfolio in this way. Of course, the dividend income is still not guaranteed. As we saw last year, for example, an unexpected event can lead to widespread dividend cuts and cancellations. But if I invest in a range of high-quality companies with a policy of paying dividends, I reckon the chance of receiving income from them over time is significant.
Why I like dividend shares as a passive income idea
Given there are other ways I could seek to earn passive income with £10 a week, what is it about dividend shares that attracts me?
I like the fact that I don’t have to do any work. I can simply invest my money in some well-known companies and rely on them to put in the effort. In an age of inflation, I also like being able to target income of 5%, 6% or even higher by investing in dividend shares even among well-known large companies. While there’s more risk in shares than investing my money in a savings account, for example, I think the superior passive income potential compensates me for that risk. Putting aside £10 a week, every week, I think I could start to build passive income streams for the years and decades ahead.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
