The idea of receiving unearned income on a regular basis appeals to me. Investing in dividend-paying shares could be one way to make it happen. But the problem is that to buy shares I need to have money. And if I already had lots of spare money, I might not be thinking about setting up passive income streams in the first place!
I do think it is possible to start earning regular income by putting aside £45 a week. But is doing that worthwhile? Below I consider both sides of the equation.
How dividend shares generate passive income
If I invest in a company that pays dividends – such as BP or Tesco – I will receive a payment for each share I own. So the more shares I own, the bigger a payment I should receive. On top of that, if I buy dividend shares today I will be entitled to any dividends paid for as long as I own them. So I might spend money buying BP shares today and still be getting regular passive income from that move for years to come.
But dividends are never guaranteed. I would reduce my risk of a disappointing investment by diversifying across different companies. Even then, I might still find that my dividend income falls if a company performs poorly or a recession leads multiple firms to cut their payouts.
Passive income streams on £45 a week
£45 a week is a manageable enough amount that I could fund it regularly. But it is substantial enough to have a real impact in helping me hit my passive income goals. It adds up to over £2,300 each year that I could invest in dividend shares.
I would first set up some sort of account in which I could trade shares, such as a Stocks and Shares ISA. Then I would use the money I saved in it to buy shares that offered me an attractive passive income. As I would be looking for future dividend opportunities, I would focus on companies that I felt had strong future potential to generate cash. That is what funds dividends, after all.
Setting my expectations
How much income I would receive depends on the average dividend yield of the shares I bought. But say I targeted an average of 5%, which I think is an achievable aim. That could earn me around £117 of income per year in future.
If I kept putting aside £45 each week in years two, three, and beyond, my investment pile would grow. Hopefully my passive income streams would also start to get bigger as I used the funds to buy more and more dividend shares.
Is it right for me?
One interesting point here is that at first the maths might not seem attractive. If I just saved £45 in cash each week for three weeks, I would already have more than £117 cash in hand. So what is the point of saving for a whole year to generate that level of passive income?
It is the difference between having money that I spend once and is gone, compared to passive income streams that hopefully will keep generating unearned income for years to come. I find that attractive given my personal financial objective of boosting my income. I would happily use £45 a week to make that happen.