Passive income is money received without working for it. Investing in UK dividend stocks is one of my favourite ideas for passive income streams. I like the idea of being able to get a share of any income paid out by a blue chip company rather than spending my own time and effort on unproven moneymaking schemes.
For the cost of a daily pint, I think it’s possible for me to build meaningful passive income streams by investing in UK dividend shares. Here’s how.
Putting aside money regularly
To buy dividend shares I’ll need money. It’s fine if I don’t have any spare cash to start with – as long as I can build up a nest egg. I like the approach of putting aside a small amount of money very regularly. For example, I could put the aside the cost of a pint or coffee each day, something like three or four pounds.
This has the benefit of not being as painful for my finances as a bigger sum going out monthly. It also helps me to get into a disciplined way of thinking about building up a nest egg by setting aside a little, often. It soon adds up – a year from now, setting aside £4 a day would give me an investment fund approaching £1,500. That’s capital – how would I use it to generate passive income streams?
Efficient ways to invest
One of the practical challenges of investing in UK shares is that dealing fees can eat into capital. So I’d look for a cost efficient Stocks and Shares ISA. Then, I’d wait until I had my first £500 or so and invest it in UK dividend stocks. I’d be keen to invest in more than one company, as diversification could help reduce my risk if an individual choice turned out poorly. So, after my first £500 was invested, I would put my next £500 into UK dividend stocks as soon as I could.
But while waiting a few months for the cost of a daily pint to add to up to a significant sum to invest, I’d already start researching UK dividend stocks. That way, I could draw up a shortlist of investment options I found attractive for when I had accrued enough money to make my first purchase.
UK dividend stocks as passive income ideas
In choosing UK dividend stocks to generate passive income streams, I’d focus on the principle of a ‘margin of safety‘. I would ignore incredible sounding little-known shares and instead stick to blue chip names with a track record of paying out meaty dividends.
But looking to the past doesn’t necessarily predict the future. Last year, for example, oil major Shell cut its dividend for the first time since the Second World War, hurting many investors’ passive income streams. Dividend cuts or cancellations are always a risk. So I would look at a company’s current outlook and prospects. Does it have a sustainable competitive advantage? Does it seem likely that it will produce sufficient free cash flows in coming years to cover dividends?
When dividends came in, I could draw them as passive income. Alternatively, I could reinvest them alongside my continued daily contribution of the cost of a drink, in the hope of building larger passive income streams down the line.