The idea of earning money without having to work for it has an obvious appeal for many people. While it might sound like pie in the sky, all sorts of people earn passive income everyday by owning rental properties, dividend shares, farmland, and a host of other ways.
I like buying dividend shares as a passive income idea. It does not require a large amount of money upfront. It will also hopefully not cause me a lot of time and hassle to manage down the line. If I wanted to set up lifelong passive income streams, here is how I could go about it.
Put money aside regularly
To earn dividend income, I will need to own shares that pay dividends to shareholders.
So I will either need to invest money upfront, or save money on a regular basis to invest. If I put aside £5 a day, by the end of my first year of saving I would have over £1,800 to invest. Over time, saving and investing even a small amount regularly could lead to substantial passive income.
How much? That depends on how much I invest, and what dividend yield I get from the shares I own. For example, if I invested £1,800 in shares with an average dividend yield of 4%, I would expect to receive £72 of income in my first year. The following year, the same shares should still pay me the same amount, unless they change their dividends. But I would also have new money from my saving which I could invest. The more years I did this, the larger the passive income I would hopefully generate. If I kept my shares and continued saving, I could keep earning for the rest of my life.
Dividend share risks
That is not guaranteed, though. A company can cut or cancel its dividend. Shell had not cut its payout since the war but did so a couple of years ago, catching many investors by surprise.
It is also worth remembering that a share price may fall. So I might end up owning shares that pay me dividends, but are worth less than I paid for them. However, if I hung onto them and simply kept receiving the dividends, that may not bother me much.
Making a move to start earning passive income
To find shares I could buy, I would start by looking for businesses I understand that I thought had a lot of future profit potential. That is because profits fund dividends. As I am looking for future dividends, I would focus on businesses I thought could do well in the coming years. Those might not be the same companies that have prospered in the past.
I would then focus on shares I liked that offer attractive yields. If my focus is setting up passive income streams, there is no point in me buying great businesses that seem unlikely to pay dividends. So while I would happily buy Google owner Alphabet for a portfolio of growth stocks, I would not invest it in if passive income was my objective. Instead, I need to hunt for brilliant income shares.