I’d like to earn some money on the side without having to work for it. I reckon I can set up a plan to earn an extra £3,000 in passive income this year.
So how would I do it and how much would I need to get started? Those are the answers I hope to answer. Let’s get started.
Passive income plan
Firstly, my plan involves investing in dividend shares. These are shares in companies that pay a portion of profits to shareholders. It’s important to note that dividend payments can vary, company by company. I’d also note that not all companies pay dividends either.
The level of dividend that a business pays relative to its share price is measured by the term dividend yield. On average, FTSE 100 shares pay a dividend yield of 3.4%.
But my plan doesn’t involve earning just the average yield. I reckon it’s possible to earn a much more lucrative dividend yield with some extra research and planning. By carefully selecting a variety of income shares, I’d say it’s possible to realistically earn around 6% in dividends every year.
Now, based on this assumption, I calculate I could earn £3,000 in passive income by investing £50,000. But what if I don’t have that amount of money to start? Many years ago, I first started investing with a more modest sum. But by saving I was able to frequently add to my pot. And over time, history shows that investments tend to grow. Yes, there are ups and downs, but the general trend is higher over many years.
I’d note that it’s possible to start earning some passive income with as little as £100. Yes, the dividend payment on such an investment is unlikely to amount to much, but I reckon it’s important I start somewhere and grow the pot with savings.
Getting started
First, I’d open a Stocks and Shares ISA and fund the account. Next, I’d go about searching for the best dividend shares. I could consider shares with the highest dividend yields. But a word of warning. Particularly high dividends might not be sustainable. I’d stay away from any company offering more than 10%. For me, the sweet spot is 4-8%.
Rather than picking just one or two shares, I’d want to select a few companies from different sectors. This way I can diversify and spread my risk. I wouldn’t want to be putting all of my eggs in one basket.
Top dividend shares
Which shares should I buy right now? Currently, I’d look into Phoenix Group, Imperial Brands, and BP. They all fit my sweet spot dividend yield criteria. I also like that all three picks are showing signs of earnings growth. Lastly, they have a reasonable track record in paying out dividends. I’d say this last point is an important one when looking for passive income. I’d prefer reliable payers to earn reliable passive income over time.
By adding funds to my pot, and continuing to add to my holdings of the top dividend shares, I reckon I should be able to build a nice passive income stream. Then it’ll just be a question of which fun activities to spend it on. Or I guess I could be less fun and reinvest it instead.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.
