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The idea of earning passive income is appealing to me. What is less appealing is the amount of work involved in some supposedly passive schemes to earn income.
That is why I prefer to earn income by investing in dividend shares. I can benefit from the success of large, proven companies without doing the work myself.
Such an approach can be lucrative and need not involve a lot of cash upfront. In fact, I could start with nothing and put in a fairly modest amount on a regular basis to build up funds to invest.
Here is how I could do that with £5 a day.
Getting started and ready to invest
My first move would be to get into a regular saving habit. So I would look around and find the share-dealing account or Stocks and Shares ISA that seemed best-suited for me.
Having made my choice, I would then start paying in £5 each day.
Building income streams, thanks to dividends
That ought to mean I had over £1,800 a year to invest. If I did that at an average yield of 6%, my first year of savings ought to earn me almost £110 in passive income annually.
Rather than take that out immediately though (which I could), I would prefer to reinvest the dividends in shares, alongside an ongoing £5 each day. Doing that, after a decade, I ought to have a share portfolio worth close to £25,000, generating just under £1,500 of passive income each year.
Finding the right shares to buy
Is a 6% yield realistic? I believe it is, not only from one share but as an average from a diversified portfolio. To illustrate the sort of share I would be looking for, I will use one that currently actually yields well above 6%. In fact, the yield is 9.5% right now.
The share in question is one I own, namely M&G (LSE: MNG), the asset manager with a large customer base and proven business model.
When investing I look for markets I think are set to benefit from substantial long-term customer demand. I think that is true for asset management. I also look for companies that have a competitive advantage. Again, I think that is true for M&G, with its strong brand and large customer base.
The company’s approach is to try and maintain or grow its dividend per share annually. As an investor though, I need to be aware that no dividend is ever guaranteed. If there is a sudden market downturn and people pull their funds, I could imagine both revenues and profits at M&G falling sharply.
Still, the company is an impressive passive income source for me and I hope that will remain the case in future. I have no plans to sell my M&G shares.
