Wouldn’t it be nice to earn some money without working so many hours? I’d like income that flows into my account regularly, without much input from me.
That’s passive income. And one of my favourite ways to earn it is from company dividends. By investing in a company, I can let it do all the hard work. It can sell a product or service, hire employees, and grow the business.
It can work hard to create a profit and, as a shareholder, I can sit back and watch my dividend income flow in.
Where to find passive income from shares
Earning passive income from stocks and shares is almost like rental income from a buy-to-let property. Except I wouldn’t need to maintain a property or deal with leaky taps.
That said, I would need to decide which companies to invest in. But by doing some homework, I should be able to find some solid businesses that I believe can thrive over the coming years.
The first place I’d start for a quality passive income is the FTSE 100. Many of the large businesses in this index are established, mature, and have solid foundations. Currently, the average FTSE 100 dividend yield is 3.6%. But as that’s just an average — there are several shares that yield much more. For instance, Persimmon and Rio Tinto both currently yield over 11% and Imperial Brands yields 8%.
Bear in mind that dividend yields aren’t guaranteed to stay at their current levels. Companies might find if their earnings decline, they may need to reduce dividend payouts. It was a common occurrence during the Covid crash of 2020 when there was plenty of uncertainty surrounding earnings.
Just £3 a day
So how much do I need to generate a passive income for life? It’s possible to start small at first. Even £3 a day can add up over time. Over a year, it works out to be £1,095.
By investing it in the three FTSE 100 shares mentioned above, that could produce £110 in passive income in the form of dividends.
It may not sound like a lot right now, but over time I could add more of my savings to grow my pot. But I reckon it’s important to start sooner rather than later. That’s because instead of spending my passive income, I’d prefer to reinvest it and buy more shares.
That way, I could earn dividends on my dividends. The result of which is commonly described as the magic of compounding. Sounds cool, eh?
It does to me. The most valuable lesson to earn the the greatest amount of passive income over time is to start as early as possible. By doing so, eventually I should have enough dividend income to supplement my day job. Perhaps one day, it might even be enough to replace it. Either way, I better get started. After all, it’s just £3 a day.