Dividend shares are my favoured method of generating passive income. Certain side hustles are good options too, but often they’re not truly passive. This is where a portfolio of dividend shares can really work. I can start with as little as £5 each day, and build a portfolio of stocks for the long term. Here’s how I’d start today.
Little and often
£5 each day might not sound like a lot. But it really can build with a consistent savings plan. After all, I spend more than this each day on my coffee!
If I keep adding to my pot with £5 each day, then over one year I’d have saved £1,825. This would be the start of my portfolio so I could begin buying dividend shares. Then, if my portfolio achieved a 5% dividend yield, I’d earn an extra £91 each year. It might not be a huge amount to begin with, but it’s the start of a long-term plan.
To make sure I always stick to my savings plan, I’d set up a direct debit via my broker account. The Motley Fool has a great guide on the best accounts to choose from here.
Dividend shares
This was the savings part of my plan. It’s certainly important, but I’m not going to make much in the way of passive income by just saving £5 each day. Instead, I need to buy reliable dividend shares too.
One thing I need to account for is share dealing costs. Brokers charge fees to buy shares, so I’d need to save up for a little while before I invested. I’m aiming for £1,000 before I buy any shares, so that’d take me just over six months. In reaching £1,000, I could add a few stocks to my portfolio at once so it’s more diversified. I could follow this process roughly every six months.
Now comes the fun part. Researching companies to buy in my portfolio to suit my risk profile. I like to aim for a 5% dividend yield. The FTSE 100 is a great place to look for companies that pay high dividends. It’s not just about high dividend yields though. It’s just as important to check how reliable the companies have been in paying dividends over the years. And finally, what the dividend coverage is – or now much net income a company earns relative to the dividend it pays. The higher this is, the better.
Dividend investing can be risky, so I like to add different sector exposures to my portfolio. For example, Persimmon paid bumper dividends in the years leading into the financial crisis of 2008. Then, of course, the housing market crashed and Persimmon cancelled all dividend payments. The company is paying a sky-high dividend again, but I certainly wouldn’t rely only on this company for my passive income.
Long-term passive income
Investing is always going to come with risk. This is where portfolio diversification helps a lot.
But, taking a long-term approach gives me a great chance of investing success. Then, if I can increase my £5 per day savings to, say, £10 each day, I could double my passive income from £91 to £182. Being consistent with this plan means I should be on my way to earning passive income for life.