Getting money without working for it sounds too good to be true. But that is the idea behind building up passive income streams – something millions of people are doing right now.
One of my favourite passive income ideas is investing in shares that pay dividends. I like that partly because I can do it even if I do not have much money to start with. Here is how I would aim to build passive income streams using £35 a week.
Starting from zero
I do not need any money to set up my passive income plan. But I will need some as I go, to buy the shares I hope will pay me dividends.
So I would get into the habit of regularly putting aside some money. £35 a week strikes me as a reasonable amount – it is modest enough to be realistic, but big enough to help me start earning passive income. In a year, £35 a week adds up to £1,820. If I invest that in shares with an average dividend yield of 5% I could be looking at £91 in annual passive income from my first year’s savings alone.
Getting ready to buy shares
As I save the money, the point will come when I have enough funds to start buying shares. So I would set up some sort of share-dealing account or Stocks and Shares ISA. That would enable me to invest my money in shares when I wanted to make a move.
I would also use this time while I saved to learn more about the stock market. If I want to buy shares that can provide me with passive income streams, how do I know which ones to choose? The answer will be different for different investors. But to help make my own choices, I would want to understand more about how companies fund dividends and what to look for when trying to choose dividend shares.
For example, how could I choose between Imperial Brands with its slow-growing 8.5% yield and Tesco with its fast-growing 4% yield? Why have both companies cut their dividends in the past decade – and what are their future prospects like? To start to understand how things work, I would want to want to read up on things like how to read a company’s cash flow statement. That might not sound exciting, but I think it is important as cash flows are what fund dividends – and potentially my passive income streams.
Setting up passive income streams
Once I understood how the market worked better, I would begin choosing shares to buy with my portfolio. No matter how attractive a company looked, I would always diversify my holdings to limit the impact on my portfolio if one company cuts its dividend or struggles in some way. For example, miner Rio Tinto has a 10% dividend – but if metal prices fall, the payout could tumble too.
When looking for dividends, I first try to find companies I think have a sustainable competitive advantage. If that can fuel large future profits, it might mean big dividends too. At an attractive price, I would add such shares to my portfolio and start building up passive income streams.