While the idea of getting money without working for it may sound too good to be true, lots of people do just that every day. From rental properties to dividend shares, investors have a wide range of passive income ideas open to them.
Some require a lot of money upfront to get started, though. That is why I like investing in dividend shares. I can do it with whatever I have, even if I start from nothing. Here is how I would use £3 a day to try and build passive income streams for life.
Dividend shares as passive income ideas
When a company makes profits, it can do several things with them. It might reinvest them in the business, save them for future needs or divvy them up between shareholders.
Some companies decide to reinvest in their business. But a lot have limited reinvestment opportunities, for example because they operate in mature markets. So, many companies return at least some of their profits to shareholders as dividends.
That is never guaranteed, though. A change in business fortunes or corporate strategy can lead to a dividend being cut. So I make sure to invest in a variety of different dividend shares. That way, hopefully I can keep getting passive income even if some of the shares cut their dividends in future. This is how I aim to earn passive income for life.
Starting with £3 a day
£3 a day may not sound like much. But over time, it adds up.
In a year, saving that much would give me £1,095. If I invested that in shares with an average dividend yield of 5%, I would expect to earn passive annual income of around £55.
Imagine that I held those shares and kept saving at the same rate in year two. Not only would I hopefully earn dividends from newly purchased shares, I ought also to earn dividends from what I bought in year one. In this way, over time, £3 a day can lead to growing passive income streams.
Choosing shares to buy
I have used 5% as an example, but some blue-chip names yield more than that. For example, Vodafone offers 5.9%, British American Tobacco 6.6% and Legal & General also offers 6.6%.
But if I aim to set up passive income streams for life, I ought not to focus only on the payouts today. After all, they could change. Instead, I look at the long-term prospects for a company. I want to figure out whether it seems likely to generate substantial free cash flows in future to fund dividends. Having some sort of competitive advantage might help a firm do that. Examples include a patented product, iconic brand or unique business model.
I would keep things simple. If I cannot look at a company’s annual report and figure out whether it seems attractive from a dividend perspective for the coming years, I would not buy it for my portfolio.
With £3 a day, patience and discipline, a simple approach would hopefully see my passive income streams grow in the years to come.