The idea of receiving unearned income on a regular basis appeals to me. Investing in dividend-paying shares could be one way to make it happen. But the problem is that to buy shares I need to have money. And if I already had lots of spare money, I might not be thinking about setting up passive income streams in the first place!
I do think it is possible to start earning regular income by putting aside £45 a week. But is doing that worthwhile? Below I consider both sides of the equation.
How dividend shares generate passive income
If I invest in a company that pays dividends – such as BP or Tesco – I will receive a payment for each share I own. So the more shares I own, the bigger a payment I should receive. On top of that, if I buy dividend shares today I will be entitled to any dividends paid for as long as I own them. So I might spend money buying BP shares today and still be getting regular passive income from that move for years to come.
But dividends are never guaranteed. I would reduce my risk of a disappointing investment by diversifying across different companies. Even then, I might still find that my dividend income falls if a company performs poorly or a recession leads multiple firms to cut their payouts.
Passive income streams on £45 a week
£45 a week is a manageable enough amount that I could fund it regularly. But it is substantial enough to have a real impact in helping me hit my passive income goals. It adds up to over £2,300 each year that I could invest in dividend shares.
I would first set up some sort of account in which I could trade shares, such as a Stocks and Shares ISA. Then I would use the money I saved in it to buy shares that offered me an attractive passive income. As I would be looking for future dividend opportunities, I would focus on companies that I felt had strong future potential to generate cash. That is what funds dividends, after all.
Setting my expectations
How much income I would receive depends on the average dividend yield of the shares I bought. But say I targeted an average of 5%, which I think is an achievable aim. That could earn me around £117 of income per year in future.
If I kept putting aside £45 each week in years two, three, and beyond, my investment pile would grow. Hopefully my passive income streams would also start to get bigger as I used the funds to buy more and more dividend shares.
Is it right for me?
One interesting point here is that at first the maths might not seem attractive. If I just saved £45 in cash each week for three weeks, I would already have more than £117 cash in hand. So what is the point of saving for a whole year to generate that level of passive income?
It is the difference between having money that I spend once and is gone, compared to passive income streams that hopefully will keep generating unearned income for years to come. I find that attractive given my personal financial objective of boosting my income. I would happily use £45 a week to make that happen.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.
