Is it possible to set up passive income streams that could go on for decades to come? I think it is – without even needing to spend large amounts of money upfront. Here is how I would go about it.
My passive income plan: buy dividend shares
At the heart of my approach is the idea of buying shares that I hope will pay me dividends in future. A dividend is money a company pays out to shareholders, for example because it makes more profits than it needs to invest in running its business.
Once I buy shares in a company, I will be entitled to any dividends it pays for as long as I hold them, even decades into the future. That is why the right moves today could help me set in motion a passive income plan that really does turn out to be lifelong.
Funding the share purchases
Buying shares takes money. But even with no savings I could start putting aside money regularly today to fund my share purchases.
If I put £3 each day aside for this purpose I would save nearly £1,100 each year. How much passive income I might earn from that depends on the average dividend yield of the shares I buy.
If I invest in shares yielding 5% on average, my first year’s savings should hopefully generate annual income of nearly £55. Each year I can hopefully earn more dividends from extra shares I have bought with my latest savings – while also getting dividends from shares I already own.
Along with the possibility of dividend increases by companies, that could hopefully see my passive income grow more substantially over time. That is not guaranteed however. Dividends are never certain. Indeed, that is one reason I would spread my investment over a diverse range of shares. That way, if a company cuts its dividend, the overall impact on my passive income will be limited.
Finding dividend shares to buy
I would put my daily £3 savings into some form of share-dealing account or Stocks & Shares ISA so I was ready to start investing whenever I found a share I liked.
But how would I hunt for such shares? To pay dividends now and in the future, a company needs to make money. So I would look for a business sector I expect to experience strong future demand. For example, I think people will want to invest in future so in my own portfolio I own asset managers including M&G.
I would then look at whether a company had a specific competitive advantage that could help it be profitable, even in a crowded marketplace. An example from my own portfolio is Victrex. The industrial company has patents on certain polymer technology which should help to differentiate it from rivals.
Next I would consider the valuation of a share and the dividend yield. If my focus was on generating passive income, I would not invest in a great company with a low yield. For example, I own JD Sports for its growth prospects. Although it pays dividends, the yield of 0.3% is far less than I could earn from other companies I also find attractive.
So with passive income as my objective, I would hunt for great businesses that also offer me an attractive yield.