I think it’s possible to earn passive income putting aside a fairly small amount of money regularly. By investing in UK dividend shares, here’s how I would aim for passive income using £5 a day.
How can dividend shares be a passive income stream?
Shares are like tiny chunks of companies. So when a company makes a profit, often it basically divvies at least some of it up among shareholders. Typically the payout – which is called a dividend – is based on the size of one’s shareholding. So, the more shares in a company I hold, the bigger I could expect my dividend payment from it to be if it makes one.
So far, so good. But there are several points I need to bear in mind. First, not all companies pay dividends. Secondly, dividends are never guaranteed. So even a share with a track record of payouts could cut or cancel the next one. Thirdly, if I use money to buy dividend shares, their value can change over time. So while looking at dividend levels, I seek to avoid the trap of buying a high dividend share whose price could be set to fall.
With those caveats, investing in UK dividend shares ranks among my top passive income ideas. It lets me own a sliver of a company like BP or Tesco. Instead of doing the hard work myself, I can benefit from their large workforces and business strengths.
With £5 a day, I could start now
BP is a massive company with operations around the globe. It’s valued at £66bn. So it might seem a bit odd that I reckon BP would be interested in my humble fiver. It’s worth more than ten billion times that much!
But remember, as I said, shares are like tiny chunks of companies. That £66bn valuation (which we call a market capitalisation) is composed of billions of shares. In fact, I can buy a share in BP and still get change from £5. I wouldn’t do that, though, as typically dealing in shares involves paying some commission. So, to reduce the proportionate impact of such charges, I would wait until I had more money saved up to invest.
At £5 a day, after a couple of months I would have around £300 already. I would be comfortable using that to buy my first lot of UK dividend shares. The couple of months between starting my daily £5 saving habit and making my first purchase of shares could actually be quite helpful. I could use them to research shares in more detail and hopefully try to avoid some common mistakes people make when they begin investing.
Will I really get passive income?
As dividends are never guaranteed, neither would my passive income be.
But over time, I could build up a diversified portfolio of leading UK dividend shares. I could add in overseas income picks too, though it would take time to do my research and make sure I knew the risks. Hopefully, for just £5 a day, that diversified portfolio would help me improve my likelihood of a growing regular passive income stream.