One of my favourite ways to earn passive income is to invest in dividend shares. I like this method because it allows me to receive money from the success of large, well-known companies without having to do anything myself for it.
So far in 2022, stock markets seem to have been nervous. That could make it a lucrative time for me to start building passive income streams by investing in dividend shares. Here is how I would aim to do it with just £3 a day.
Starting small
If I wanted to buy a property in the hope of getting rental payments, I would need quite a bit of money to begin. With shares, I can start with nothing and build up slowly. £3 itself is not enough for me to start investing, after commissions and fees are considered. But £3 a day would add up to almost £1,100 a year. That is definitely enough for me to set up passive income streams in the stock market. It is also enough for me to diversify my portfolio by investing in different companies. I think that is important as it will help me to reduce my risk if any one company disappoints me.
Investing not trading
But while the prospect of buying shares – perhaps for the first time – may seem exciting, I would try not to get carried away with it. Trading regularly brings costs. It can also be nerve racking. Instead of being a trader, I would set out to be an investor.
That means that I would be on the lookout for good companies with strong income prospects that I thought I might hold in my portfolio for years. After all, if a share is attractive enough for me to buy now because of its passive income prospects, hopefully if it keeps performing the same way it will still be a suitable choice for my holdings in years to come.
Doing research to find passive income ideas
While I was waiting for my daily £3 savings to mount up, I would use the time to research some companies in which I might want to invest. I think it is important that my passive income plan focusses on my own financial priorities. What is right for other investors might not suit me.
For example, if I wanted to receive regular passive income, I might be more attracted to companies that pay dividends quarterly or even more regularly, such as Unilever and Games Workshop, rather than those that pay just once or twice a year, such as Antofagasta.
But I might be more interested in size not timing of dividend payments. If I invested £3 a day I would have £1,095 after one year. Investing that at an average yield of 2% — what I could earn from Games Workshop, for example — would earn me just under £22 of passive income a year. But if I invested in shares with an average yield of 8%, like Imperial Brands, after one year my portfolio would hopefully be generating almost £88 of passive income per year.
Dividends are never guaranteed though, so I would want to hunt for companies whose future outlook I felt was strong. I would also pay attention to prospects for dividend growth. With some dividend shares experiencing price falls, the current market turbulence could provide a useful hunting ground for me.
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Christopher Ruane owns shares in Imperial Brands and Unilever. The Motley Fool UK has recommended Games Workshop, Imperial Brands, and Unilever. 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.
