Setting up passive income streams could help me have more money in future without working for it. But what if I don’t have much money now? How can I start?
I reckon it’s possible to start earning passive income by investing in dividend shares, even with a little bit of money. Here’s how I would do it with a couple of pounds a day.
Dividend shares as passive income ideas
The reason I like dividend shares as passive income ideas is that I can benefit from the hard work of well-established businesses without having to do anything myself. With interest rates low, that means I might get more passive income from my money than I would by parking it in a bank account. That said, owning shares does bring risks.
Not all shares pay dividends. And those that do can stop, for example, if business worsens or management decides to use the money to grow the company. So I would try to diversify across a few companies in different sectors. Two pounds a day adds up to £730 in a year. That would be enough for me to diversify across two or three different stocks in my first year of investing. If I invested in shares with an average dividend yield of 4% — close to the current FTSE 100 average — £730 could hopefully generate around £29 of passive income per year.
Focus on what I understand
It can be tempting to invest in companies that have high dividends. But if I don’t know where those dividends come from, how can I feel comfortable about the likelihood of them continuing?
That’s why I focus on dividend shares in companies I understand. That way, I feel I am in a better position to evaluate their performance and financial results. This can be as simple as starting with companies I use personally. For example, if I shop at Sainsbury, eat lunch at Greggs and use Vodafone for my phone then I already know something about those companies from a customer’s perspective. I would not just base my judgement on that though. I would also look at financial results. They are usually available free online.
Of course, I can always learn about other industries I don’t know by reading up on them. So focusing on what I understand would not necessarily limit me to a small number of possible passive income picks for my portfolio. I would take time to read though. I think I ought to know how companies make money and what their prospects are before I buy them — not afterwards.
Make the move
It’s easy to talk about passive income. But I notice that even a lot of smart, motivated people hold back from taking action. For my passive income streams to become real, I have to do something!
That can be easy. To start, saving £2 a day, I’d want a share-dealing account or Stocks and Shares ISA in which to put the money. Then, as it piled up, I could take some time to research companies. I would also learn more about the stock market. Once I had chosen some investments that seemed right for my own investment criteria and risk tolerance, I could buy. Then I would keep saving my daily £2, while hopefully watching my passive income streams grow.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. 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.
