What can you do with £10 a week? Visit the pub, go for a lunch, buy a paperback book? In some cases, a tenner might actually not be enough even for those activities. But you can also start trying to improve your long-term financial situation, by setting up passive income streams.
Dividend shares as passive income ideas
When it comes to passive income, some people use ideas that need a lot of money to begin. But in reality, not everyone is sitting on a pile of cash.
Dividends are payments a company makes to investors who hold its shares. They are a bit like profit sharing. To buy dividend shares, I do not necessarily need a lot of cash upfront. That is one reason I like them as passive income ideas. Putting aside a steady £10 each week, I could grow an investment pot and use it to buy dividend shares.
Finding shares to buy
But how would I decide what shares to buy? After all, dividends are never guaranteed and if I buy shares that end up going down in price, I could lose money.
So I would start at the basic level, thinking about what a dividend is. I said above it is like a share of profits, which means that to keep paying dividends in future, a company will need to earn profits. That will require it to have a customer base. So I would look for businesses with a potential or existing customer base I expect to stay strong.
The firm will also need some advantage that helps protect it against a competitor simply undercutting it on price. Otherwise, it could end up making lower profit margins even it sells a lot of products or services. That could mean the dividend gets cut.
What sort of companies have such an advantage? I think lots do. Nike and McDonald’s have brands that make them unique. Companies like Pfizer and Microsoft have patents that help them keep profitable products out of competitive hands.
But I would also focus on a couple of other principles. As well as a good business, I want to buy the shares at what I think is a good price. I like Apple as a company and would consider buying it for my portfolio – but not if my focus was just on passive income. With a dividend yield of 0.6%, the income prospects alone of owning Apple do not appeal to me.
I would also make sure to spread my share purchases across a diversified range of businesses. That would lower the risk to my earnings if one of them disappoints me.
Starting small
I also need to be realistic about what I can earn. Investing £10 a week adds up to £520 in a year. If I invested in shares with an average yield of 5%, that would hopefully give me £26 a year in annual dividends. I would be earning passive income — but not very much, at least in the beginning.
But starting small is fine by me. If I continue adding £10 a week, over time my passive income should grow, even if the companies do not raise their dividends. If they do – and hopefully if I have chosen strong businesses they may do – that would help me too!