Setting up passive income streams can be a way to increase my earnings over time without working more. One of the ways I do that is by investing in dividend shares. If I put £10 a day aside for this, I think I could start generating unearned money in the space of a few months. Here is the passive income plan I would use to go about it.
Get into the habit
Saving is habit forming, which is why I would make sure I set aside £10 each and every day – starting today.
I could do that by setting up an automatic transfer, or using a good old-fashioned piggy bank. However I decide to save, I see value in getting into the habit. One of the attractions of passive income is that I can start earning it even if I do not have much money – but to do that, the more I save the more successful I am likely to be. So saving £10 a day when I am flush with cash, but also when I am more hard up, could help me lay the foundations for my passive income streams in a disciplined way.
Decide on my objectives
I would also think about what I want to achieve. The answer may be obvious — income! But in fact, there are different approaches to income.
For example, I could invest in a company that tries to hit a certain dividend level it has declared in advance, like Persimmon. I could go for a share that aims to pay out regularly each quarter, like Unilever. Or I could choose one that tends to pay out quarterly but with larger dividends in two quarters than in others, such as Imperial Brands. I could also choose a company that often distributes spare cash in the form of a special dividend, such as Games Workshop. So, I would need to decide what level of income I am looking for. And does it matter to me when in the year I receive it?
Dividends are never guaranteed, and even well-run companies can run into hard times that lead to a cut. So I would try to reduce my risk by diversifying my portfolio across different shares and business sectors. £10 a day is over £3,600 a year I could invest, so I should certainly be able to spread my investments in this way. But as well as diversification, I would decide what level of risk I was willing to accept in my investment. Higher-yielding shares sometimes involve elevated risks. That is basically why they offer bigger rewards to investors. But, as with any company, such dividends can dry up at any time.
Starting to invest
My £10 a day would soon start piling up. So I would get ready to invest, first by opening a share-dealing account such as a Stocks and Shares ISA.
I would also take time to research shares I felt might be a good fit for my investment objectives and risk tolerance. Like Warren Buffett, I would stick to my circle of competence by focusing on companies in industries I felt I understood. That could help me find the sorts of companies that are the right fit for my own passive income plan.
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.
