One of my favourite passive income ideas is investing in proven blue-chip companies. I can sit back and benefit financially from the success of businesses with some specific competitive advantage that helps them earn money on a big scale.
Unlike some second income ideas, investing in shares does not require a large lump sum of cash upfront. In fact, it is possible to put aside some money on a regular basis and use that to build dividend income over time.
Here is how I could go about that with £20 a day, if I wanted to target monthly passive income of £300 within the next 10 years.
Start with saving
My first move would be to get into the regular habit of saving £20 a day.
That might be easy at first, but when bills pop up then money could be tighter. So I would make this a habit, for example by recording in a ledger each day that I had put aside the money, or setting up a standing order into a share-dealing account or Stocks and Shares ISA.
This £20 a day would soon start to add up. As long as I stuck with the plan, by the end of one year I would already have £7,300 to invest.
All of that money to buy shares, for less each day than the price of a couple of packets of cigarettes (or a round of drinks in many pubs these days)!
Choosing shares to buy
I would use these funds to invest in shares with a very specific objective: generating passive income.
I own shares in what I think are some great companies that do not pay dividends, like Google parent Alphabet, and S4 Capital. With income as my objective, though, such shares would not serve my purposes. I would be looking for companies that can generate sizeable free cash flows and use them to pay dividends.
So I hunt for a business with a large market I see as resilient. That could be anything from selling shampoo to refining oil. I stick to shares in industries I personally understand, as I think that helps me assess their prospects.
I then look for businesses with some unique competitive advantage within such an industry. For example, GSK has patents on medicines while AG Barr alone has the recipe to the Irn-Bru soft drink. Those are unique assets.
Price and yield
A great company only becomes a great investment if I buy at the right price, though.
So I focus on buying into companies only when they trade at an attractive share price.
Price also helps determine the dividend yield I earn. Yield is basically the dividends I expect to receive as passive income annually, expressed as a percentage of my purchase price.
If I invest at an average 5% yield, I should hit my passive income goal in under a decade. If I compound the dividends as I go, meaning that I use them to buy more shares, I could be earning £300 each month on average in dividends even sooner.
