Is it possible to start earning passive income with a lump sum of just £1,000? I think it is, by investing in dividend shares. Here is the £1,000 passive income plan I would use.
Starting with £1,000
When people look to start earning passive income, it is usually because they feel they could do with more money than they have. So, is it realistic to tie up £1,000 in a passive income plan when money may already be tight?
I think it is. Pulling together £1,000 might not be easy. But if I am serious about earning passive income, I will need some capital. I could save it up as I go. However, starting with £1,000 will give me a head start compared to saving a little each day. One benefit of this is that it could help me see more immediate progress than starting with nothing and saving a little each day. That sense of progress could encourage me to stick with my plan.
How much passive income could I get with £1,000?
The amount of money I could earn from dividend shares depends on what is known as their dividend yield. Basically that is the dividend a company pays expressed as a percentage of its current share price.
For example, Vodafone has a current yield of 5.8%, so I would expect £5.80 each year if I invested £100 in it. The yield on Barclays is lower, at 4.1%. I would expect £4.10 per year for each £100 I invested in Barclays shares.
Many shares do not pay dividends. So, for example, the yield on Tesla is 0%. It is the same at Amazon. So I would not expect any dividends if I invested £100 in either of these shares. Dividends can change, though. Amazon or Tesla might decide to start paying a dividend, for example. A company may also cancel its dividend, as Barclays did in 2020. And it could cut the payout, just like Vodafone did in 2019. That is why I would diversify my income streams across different companies. £1,000 would let me invest £250 in shares of four businesses.
If I can get an average dividend yield of 6%, my £1,000 should earn me £60 a year in passive income. 6% is above the average FTSE 100 dividend yield, but I think it is achievable while maintaining a prudent risk profile. Various blue-chip companies offer a yield over 6%, including British American Tobacco, Legal & General and Direct Line.
Choosing shares for my passive income plan
If I put £1,000 into a share-dealing account or Stocks and Shares ISA, I could put my passive income plan into action and start buying dividend shares.
But how could I find the right shares for my own income objective and risk profile? I would keep things simple. First, I would not invest in any business I did not understand. That is because I need to be able to assess its prospects. Secondly, I would focus on companies with a competitive advantage in markets I think will probably see long-term customer demand. Thirdly, I would choose businesses that tend to generate big free cash flows. Those are what companies need to keep paying dividends – and my passive income!