The appeal of income that does not require work is obvious. What may not be so obvious is how to turn the idea into a practical plan. I think my passive income plan could help me do that, without needing lots of money to start.
Dividend shares as passive income ideas
The central idea behind my plan is to put aside money regularly and then use it to buy dividend shares. Dividends are like a portion of profits that a company pays to shareholders. Once I own a share, I will get any future dividends the firm pays as long as I keep the share. So money spent now could still be earning me passive income years, or even decades, into the future.
I like shares as passive income ideas because they really are passive for me. I could buy a tiny part of a large company like Shell or Apple and then benefit from the vision and hard labour of its workforce. I can participate directly in the financial success of the sort of business it has taken thousands of people decades to build. But I do not need to do anything myself to generate the income.
But not all shares pay dividends. Sometimes, those that do stop paying them is because their business performance gets worse. That is why I would always diversify my passive income streams across a variety of different dividend shares.
On top of that, I do not choose shares to buy just by looking at past business results. I try to understand what a company possesses that could drive its future profitability, like energy reserves at Shell, or a large installed user base at Apple.
Getting started with my passive income plan
To buy dividend shares, I will need to save up some money. I like the idea of putting aside five pounds a day for this purpose. It is a fairly small amount, but if I maintain the discipline of saving regularly, it could soon add up. In a year, a daily £5 would add up to £1,825.
Imagine I invested that in shares with a dividend yield of 7%, which means that for each £100 I spend on a share today I hopefully can expect future annual dividends of £7. My first year’s savings will hopefully generate almost £128 a year in passive income. As I save more and buy more shares, my passive income streams could grow.
Finding the right dividend shares to buy
I used 7% as an example yield because I think it is achievable while maintaining a risk level I am comfortable with. Currently, some FTSE 100 shares such as Abrdn and Legal & General have a yield around 7%, while some others offer a higher yield.
I do not start by looking at yield though. Instead, my passive income plan would involve hunting for businesses I thought had the right assets to produce profits for many years. Profits are the foundation of dividends, after all. If such shares were available to me at a price I found attractive, I would consider buying them as part of my passive income portfolio.