The appeal of money that comes in without having to work hard for it is clear. But the good news is that such passive income isn’t just a pipe dream. One of my favourite passive income ideas is investing in UK dividend shares. Here’s how I would use them to start building my passive income streams, in three steps.
First – get funds
While passive income doesn’t require work, in this case it does require some capital to start with. If I had some on hand I could use that, but what if I had no money to spare? In that case, my approach would be to set a target for whatever I could afford to set aside each day – even if was not much – and start saving. That would help me get some capital to invest, as well as create a disciplined approach to capital accumulation which could help in all my investing. An additional benefit of needing to start from scratch is that it would give me some time while saving to do research on shares that I could buy.
Second – choose shares for passive income
The second stage matters a lot: choosing shares. Each investor has their own strategy and risk tolerance, so what works for a different investor won’t necessarily be right for me.
With passive income as my objective, I’d be looking for companies with high payouts projected in coming years. Dividends are never guaranteed, but to judge their likelihood, I’d be looking at some metrics for the companies in which I was interested. For example, what’s their free cash flow likely to be? How much will they need to spend to service their debt? Is their customer base set to expand or contract? What about their profit margins?
If this was my only money in the stock market, my risk tolerance might be low. I would therefore want to stick to fairly large companies with seemingly strong prospects, rather than investing in start-ups or companies in turnaround situations. I’d also try to reduce my risk by diversifying across different companies and business areas.
That would still leave me with a decent sized list of options. On my list would be companies like British American Tobacco, National Grid and Reckitt. I’d look into each company in more detail and weigh the risks in each case against the potential passive income.
Third – invest and wait
Once I had funds and an investment shortlist, I’d be ready to start buying shares. Then I’d sit back and wait for my passive income streams, still setting aside a set amount of money each day to build my investment funds.
One mistake I think many investors make is trading too much. It can cause worry and costs money. Instead, if I’d chosen shares for my passive income streams I thought were high-quality, I’d take a hands-off approach after purchase. I’d collect any passive income in the form of dividends, and occasionally keep an eye on how the companies were performing as all companies come with risk and I’d want to be sure my investments continued to pay off. I’d also be on the lookout for more companies in which I could invest in future once my investment pot has built up.