If I wanted to start generating passive income now, I would buy dividend shares. While some passive income ideas come and go, I expect building a share portfolio is something that could help me over the long term. On top of that, I could start doing it even with no savings. Here is how.
Dripping a little often
If I put £3 a day into a kitty, I would soon see my savings starting to add up. That would be the basis of my passive income plan – I could use this money to start buying dividend shares.
Although £3 a day may not sound like a lot, within a year it would add up to more than £1,000. That could help set the foundations for increasing my income in years to come. In the beginning, the passive income may not seem like much. For example, if I invest my first year’s savings in shares with an average dividend of 5%, I would expect an annual passive income of around £55. But if I keep drip feeding just £3 each day into my pot, over time the income should hopefully get to more significant levels.
Dividend shares as passive income ideas
Simply saving the money will not earn me the sort of passive income I want. Instead, I would plan to invest it. But as share dealing usually involves costs like fees, I would wait several months before investing as by then my cash pile would be growing.
I could put that time to good use by researching the kinds of shares that might best suit my risk profile. I would only invest in shares of companies I think I understand. That would help me in assessing how likely they are to keep paying their dividend in future. Even a big company like BP or Shell can cut its dividend – they both did in 2020. So I would not focus only on size, or how big the dividend is at the moment.
Instead I would be looking to see what the company might be able to earn in future to pay out as dividends. That is a judgment on my part and to make it I would consider things like whether a company has a sustainable competitive advantage that could help it make a profit even in changing markets. No matter how good my research, unexpected events could still lead to a company cutting or even cancelling its dividend. That is why I would spread my investments over different companies and business areas.
Passive income for life
Nobody knows what will happen in future when it comes to a company’s dividend. So although I think buying a diversified portfolio of shares now could help me earn passive income until I sell them, that might not turn out to be the case.
But that would be my goal. To improve the chance that I can generate passive income over the very long term, I would diversify my portfolio across a wide range of dividend shares in a variety of industries.
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.
