For me, generating passive income is what investing is all about. But I don’t need huge amounts of cash to get started.
Investing in dividend stocks allows me to receive regular cash payments that I don’t have to work for. And I could get started investing with just £2.50 per day.
Obviously, the more I invest, the more I stand to gain. But here’s how I’d build a passive income portfolio with small, regular deposits.
Building a portfolio
The first thing to note is that £2.50 per day can add up quickly. Over a year, that’s £912.50 available to invest.
Doing that for 30 years means investing a total of £27,375. That’s a significant sum all by itself.
The key to generating passive income, though, is investing in companies that distribute their earnings to shareholders.
By reinvesting the dividends I receive, I can grow my portfolio much more quickly. Alongside the regular £2.50 that I’d put aside, that would allow me to build a meaningful portfolio.
To get started, I’d look for stocks that have high dividend yields. These can be risky, since a high yield can be a sign that a company’s payments are unsustainable.
Dividend stocks
I don’t think that this is true of every stock with a big dividend yield, though. And there are some in the UK that I think are great choices right now.
The first is Lloyds Banking Group. I think that this company can do very well as interest rates rise and that its dividend is likely to grow over time as a result.
Another is Legal & General, which has an excellent record of maintaining its dividend payments. At the moment, the stock pays a dividend yielding over 8%.
Lastly, I’d buy shares in Shell. The company has a policy of returning its profits to shareholders while also investing in the transition to renewable energy.
Passive income
What could I expect to achieve by investing using this strategy? That depends on how well my investments do, but I think I could achieve a return of between 4% and 8%.
If I achieve an average return of 6%, then I’d have a portfolio worth £72,115 after 30 years. And a 6% dividend would provide me with £4,030 in annual passive income.
Of course, things could go less well. If I only achieve a 4% return, then I’d have a portfolio worth £51,157 that paid me £1,932 annually without me having to do anything.
But if things went better and I achieved an 8% return, then things could really take off for me. That would give me a portfolio worth £103,339 paying £7,585 in dividends.
There’s always risk associated with investing in stocks and returns are uncertain. But I could absolutely generate meaningful passive income with £2.50 per day.
One of the most important things about this strategy is that I continue to invest for a long time. So if I were looking to pursue it, I’d be getting started straight away.