Could I earn money without working for it? That is the idea behind passive income – and it is more than a pipe dream. Millions of people already earn passive income by investing in dividend shares. If I wanted to do that from scratch with a monthly target of £500, here is how I would go about it.
1. Start putting money aside regularly
My plan is to earn money without working – but first I will need to invest some. Without buying the shares I will not be able to get dividends from them.
I would start putting a set amount aside on a regular basis, such as weekly, or even daily. I would choose an amount that I felt was realistic based on my own financial situation, although the more I saved, the sooner I should be able to hit my monthly target.
2. Set up a way to buy shares
Saving money on its own would give me the cash but not the means to start buying shares when I was ready to do so. For that, I would set up a way to buy shares. That could be a share-dealing account, or Stocks and Shares ISA, for example.
3. Learn how the stock market works
Dividends are central to my plan, but only some companies pay them. Even those that do can stop at any time.
So before buying any shares, I would want to feel comfortable understanding how the stock market works. For example, Apple has a dividend yield of only 0.6%. That means it would hopefully pay me £6 next year in dividends for each £1,000 I invested in it today.
That does not seem much – but might Apple’s dividends grow strongly in future? After all, not only is it profitable, it generates huge free cash flows. Those can support dividends. Might a recession hurt sales and perhaps lead to a dividend cut?
Understanding these sorts of investing concepts could help me make decisions about what shares may suit my own passive income objectives.
4. Diversify across quality shares
No matter what I decide, some investments might not work out the way I hope. I would try to reduce the impact of that on my passive income streams by diversifying across a range of shares.
The higher the average yield, the less money I would need to invest to hit my target – but only if the dividends are maintained at that level. So instead of chasing yield, I start by hunting for quality companies that have a competitive advantage I think can give them pricing power.
If such a company was selling at an attractive price and I liked the dividend potential, I would consider buying it for my portfolio.
5. Start earning passive income
Building up my portfolio in this way, hopefully over time my passive income streams could grow.
Some £500 a month is £6,000 per year. To achieve that investing in shares with an average dividend yield of 5%, for example, would require £120,000.
Instead of an upfront lump sum, making regular contributions should also ultimately let me hit my target. But it may take many years. As I build my portfolio though, I would hopefully be earning at least some passive income from early on.