The idea of getting money without working for it is certainly appealing. But is it too good to be true? I do not think so, depending on how one approaches it. For example, one of my favourite passive income ideas is investing in dividend shares. By owning a tiny part of a large company, if it pays out some of its profits as dividends, I can benefit without lifting a finger myself.
Here is how I would aim to build passive income streams by using £35 a week to invest in dividend shares.
1. Get into a disciplined habit
My first move would be to start putting aside £35 a week, which is £5 a day. I might do that through electronic transfer, or physically putting the cash in a piggy bank on a regular basis. Either way, getting into the habit of regular saving would be important to my passive income ambitions, I reckon. That way, when other demands on my money arise as they inevitably will, I could focus on how to maintain my regular contributions.
Although it would take me some time to have a big enough sum to make it worthwhile for me to invest, I would set up a share-dealing account on day one. That way, when I was ready to start buying dividend shares, I could hopefully do so without delay.
2. Hunt for dividend shares to buy
As the pounds piled up, I would spend the weeks hunting for dividend shares that met my investment criteria. Different investors do not look for the same thing. As a new investor, I would also be keen to avoid common mistakes people make when they start investing.
So, for example, maybe I notice that Ferrexpo yields 12.3%. That means that £1,000 of Ferrexpo shares would hopefully yield £123 of passive income per year. That certainly sounds attractive to me at first glance. But if I looked more closely, some risks would come into view. Ferrexpo’s earnings power is concentrated in a single mining facility in Ukraine. That concentration of production in a country with heightened political risk could hurt Ferrexpo’s ability to earn profits and pay dividends in future. Added to that, its profits are affected by iron ore prices. That helps explain why last year’s dividend was more than 10 times higher than the level just four years before.
Ferrexpo might still be a good fit for me, depending on what my personal investment objectives and risk tolerance are. The point is that I would do detailed research before buying any dividend shares. I would not just look at a company’s yield without seeking to understand where the money to pay dividends came from. I would focus on finding shares with robust business models I felt could hopefully sustain or increase dividends in years to come.
3. Start earning passive income
With money in my account and research in hand, I could start buying dividend shares. Hopefully I could turn my dream of generating passive income streams into a practical reality.
At £35 a week, I would have £1,820 a year. So if I invested in shares yielding 5% on average, I would hope to earn around £91 in annual income from my first year of investing. Admittedly, that is not a huge amount. But it could well be the starting point of increasing, practical passive income streams for me.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
