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With £5 a day, I’d set up lifelong passive income streams. Here’s how

A young woman sitting on a couch looking at a book in a quiet library space.
Image source: Getty Images

The idea of passive income is simple. Earn money without working for it. The reality can also be fairly simple, in my view. By putting money regularly into income shares, I could sit back and, hopefully, earn dividends without needing to lift a finger.

I do not even need money saved up to begin. Here is how I could put this plan into action for £5 a day, starting today.

Saving money regularly

Putting aside £5 a day would help me build up some capital that I could use to invest. Over the course of a year, that adds up to £1,825. It is a decent pot of money I would be able to put to work in my hunt for dividends.

I would save the money in a share-dealing account, or Stocks and Shares ISA. That way, I would be ready to invest it as soon as I identified some shares that suited my investment objectives.

Finding income shares to buy

The core of my passive income plan is earning dividends so it might sound understandable if I now went hunting for shares with juicy dividends.

But, in fact, that is not the next step I would take.

Dividends are never guaranteed and even a long-time payer can cut its payout. For example, in 2020, I owned Shell shares when the oil major cut its dividend for the first time since the war.

Going to the source

So rather than focus on the size of dividends, I first look at what I see as the source of dividends. Consistent surplus cash generation. If a company keeps throwing off cash it does not want or need in its business, it can be used to fund shareholder payouts.

To generate such cash, it helps if a company operates in a business area that should benefit from strong customer demand. I also look for a firm to have a competitive advantage that sets it apart from rivals. That helps give it pricing power, potentially enabling it to achieve attractive profit margins that could support dividends.

Buying income shares

Next, I would start to build a portfolio of such shares, if I thought they were available to me at an attractive price.

The reason for a portfolio is simple. Diversification. No matter how great one share may seem, the unexpected can happen. So I would spread my money across a variety of stocks.

Passive income flows

Doing this, if I managed to invest in shares with an average dividend yield of 5%, I ought to earn just over £90 in annual passive income from my first year’s daily savings.

If I kept those shares and the dividends continued, I could keep earning money from them for decades. Meanwhile, if I kept on saving £5 a day, I would have more capital to put into additional shares.

Over time, sticking to my plan of action, hopefully I could build lifelong and growing passive income streams.

The post With £5 a day, I’d set up lifelong passive income streams. Here’s how 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 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.

Motley Fool UK 2023