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My £3 a day passive income plan

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Earning money without work is known as passive income. That may sound like an improbable idea – but people get such income every day. Some rent out property. Others benefit from royalties.

My own approach involves investing in shares I hope can pay me dividends in future. That does not require me to have any cash upfront – nor do I necessarily need to invest large amounts of money. Here is how I would aim to do it from a standing start, for the princely sum of £3 a day.

Building a capital base

To invest I will need some capital. Putting money aside on a regular basis can help me to build that from scratch.

The amount ought to be something that I can afford, based on my own financial circumstances. Everyone’s situation is different. But whatever I decide, I would try to get into a habit of regular saving.

To do that, I would drip-feed the money into a share-dealing account, or Stocks and Shares ISA.

Understanding dividend yield

Doing that ought to mean I have just under £1,100 per year to invest.

How much passive income could that earn me? The answer to that question depends on what dividend yield I can generate. Yield is basically my annual dividends as a percentage of what I spent on the shares. If I can achieve a 5% yield, my first year’s saving ought to earn me around £55 annually once invested.

That might not sound huge – but it is a start. For as long as I hold the shares, I would receive any dividends they paid. So, over time, my passive income streams ought to grow as I should still be receiving dividends from shares I had previously bought as well as newer investments.

Finding shares to buy

Some shares have a much higher dividend yield. For example, Diversified Energy has a 14% yield.

So would I just buy the highest-yielding shares to try and maximise my passive income? Definitely not! Dividends are never guaranteed. A company can cancel its dividend at any moment. Not only could that lead to my passive income falling, but the value of my investment could also tumble if investors mark a share down after the dividend is cancelled.

What I look for is great businesses that sell at an attractive share price. Only then do I consider their yield.

An example

Putting this theory into action, I might consider buying a share like Unilever for its passive income potential.

The company owns unique brands. That is a competitive advantage and gives it what is known as pricing power, meaning it is not in a race to the bottom when it comes to competing on price alone. That could help the consumer goods giant make profits and fund a dividend, perhaps far into the future.

Unilever shares currently yield 3.5%. But there are risks to any share. For example, cost inflation may eat into profit margins at Unilever. So even if investing only £3 a day, I would never put all my eggs in one basket. Instead I would diversify across a range of businesses.

The post My £3 a day passive income plan appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever Plc. 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.

Motley Fool UK 2023