To me, investing in dividend-paying stocks and shares is one of the easiest, most accessible, and most effective ways to get passive income.
It’s simple to open an online account to invest in shares, for example. And once it’s up and running, buying and selling shares is as effortless as clicking a computer mouse a few times.
All of that compares favourably with alternatives for building passive income. For example, think of the complexities of buying a house to rent out.
But getting passive dividend income from shares has the potential to be more effective than other methods as well. And there are many examples of successful investors who have done well. Perhaps billionaire investor Warren Buffett is the best known.
Less than the price of lunch
However, getting started can cause a few challenges if short of money. And there have been many periods in my life when the pounds have been used up on other things. But if I’d known at the age of 20 what I know now, I’d have invested £4 a day without hesitation. After all, it’s perhaps less than the price of lunch from Greggs.
A daily sum of £4 works out at around £122 a month. And that’s how I’d transfer the money into my share account — monthly. My plan would involve setting up regular monthly investments into index tracker funds and popular dividend-paying shares.
But a key part of my wealth-building strategy would be the reinvestment of that passive income stream from shareholder dividends. And to do that, I’d choose the accumulation version of tracker funds. They automatically plough the dividends back into the investment. The alternative would be the income version of each fund. And that pays dividends into the share account, ready to be drawn out.
Meanwhile, share account providers often offer a low-cost, automatic dividend reinvestment option on many popular shares. So, I’d take advantage of that. And my goal would be to compound my returns over many years. Indeed, building gains on top of previous gains is the route to wealth followed by investors such as Buffett.
The stock market tends to bounce back
Later when I’m ready, I’d switch to drawing the passive income from dividends. And by then — many years later — it will hopefully be larger than it would have been initially.
I could start my £4-a-day passive income plan at any time. But after a stock market correction, there’s often potential for rapid gains ahead. And that’s because the stock market in general has a long record of bouncing back from its lows.
Of course, good returns are not certain or guaranteed from where things are today. And it’s always possible for outcomes to work out differently than historical precedents. Indeed, all shares carry risks as well as positive potential. And underlying businesses can suffer from operational setbacks at any time.
Nevertheless, I’m engaged in a programme of regular monthly investing.