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I’d use £5 a day to start generating extra income for life. Here’s how

UK money in a Jar on a background
Image source: Getty Images

The idea of earning some extra income to help with life’s expenses is appealing. I could do this by working more hours. But another approach is to generate passive income by benefitting from the hard work of thousands of employees at highly successful businesses. That is what I aim to do by investing money in dividend shares.

One thing I like about this approach is that it does not require large sums of money to start. Indeed, I can begin with nothing and build up my income-generating investments by putting aside a small sum of money each day. Here is how I could aim to do that with £5 a day.

The power of regular saving

Getting into the habit of putting aside some money regularly could set me on a useful path. The more accustomed I grow to saving, the less likely I am to notice its absence from my daily finances.

Meanwhile, the money can pile up and form the backbone of my extra income plan. Putting aside £5 a day, I would be able to save £1,825 in a year. If I put that into shares with an average dividend yield of 5%, for example, I ought to earn over £90 per year in dividends from my first year’s savings alone.

One thing I really like about dividend shares is that once I own them, I get any dividends they pay for as long as I hold them. So the money I put aside in my first year could potentially still be earning me income decades from now, or even for the rest of my life.

To save this money ready for investment, I would set up a share-dealing account, or a Stocks and Shares ISA.

Choosing shares to buy

Saving the money is a key step in this plan – but I also need to invest it. To do that, I would look for businesses I expect to do well long into the future, generating profits that could fund dividends. Of course, the unexpected can always happen, so I would spread my investments over a number of different such companies.

When searching for investment ideas, I would aim to find firms that have a competitive advantage in a business area that benefits from large, resilient customer demand.

Tesco is an example. I expect grocery demand to remain high and the leading supermarket’s brand and economies of scale give it an edge over rivals. Similarly, the power network operated by National Grid is unique and I expect demand to remain high.

Setting up extra income streams

Buying shares in a quality business is only part of the recipe for investment success however. I also need to consider price when I buy. Paying too much for shares even in a great company can be unrewarding. It also means that my dividend yield will be lower than if I bought the same shares at a lower price.

By buying a diversified portfolio of high-quality dividend shares, I think I could set up extra income streams that hopefully could grow over time. I would keep putting aside £5 a day and buying more shares, to try and build my earnings.

The post I’d use £5 a day to start generating extra income for life. 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 recommended Tesco 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