Dividend shares can be a fantastic source of passive income. And with the stock market turning bullish again, I’m keen to invest. But when starting out several years ago, I was nervous about owning shares. And that’s because of the many stories going around about people who had put money into stocks then lost lots of it.
However, in fairness, most of those tales were perpetuated by people who didn’t themselves invest directly in stocks and shares. And the circumstances behind every story often remained unknown. For example, someone might have put all their money into a highly speculative company that went on to go bust. Or another may have bet the farm on a cyclical business — such as one of the banks perhaps — at the ‘wrong’ point in its business cycle.
Aiming to mitigate the risks
My belief, though, is that it’s possible to mitigate some of the risks that come with shares with a few careful tactics. Firstly, it can be a good idea to diversify money between several different stocks. And I’d choose businesses operating in different sectors.
Secondly, it’s essential to research the enterprises behind each stock opportunity with care. And I’d look for a strong, multi-year record of stable cash-generation and shareholder dividend payments. On top of that, I’d want a company to have a long runway of growth potential ahead for its earnings.
Thirdly, my focus would be on a company’s ability to pay shareholder dividends. And that’s because dividends tend to prove a business has real earnings and not just paper profits. And a healthy dividend yield suggests a business might have a fair valuation.
With such considerations in mind, my passive income plan would involve pooling my £25 weekly savings into monthly sums. And that’s because earned income tends to arrive that way. Then I’d set up a regular low-cost investment arrangement with my share account provider. The money would be invested for minimum fees into my chosen dividend-paying shares.
A focus on the compounding process
However, because of being in the building stage of my portfolio, I’d reinvest dividends along the way either manually or automatically. For example, one option is to use my broker’s low-cost dividend reinvestment facility. And the reason for reinvesting dividends is to aim for compounding the value of my holdings.
But the process of compounding works best when conducted over very long periods of time. So an essential part of my plan for passive income for life is the adoption of a long-term mindset. In other words, I’d aim to become a lifelong investor. And that means contributing new money to my investments while I’m working and earning as well as holding my shares for years.
Positive long-term outcomes are never guaranteed because all shares carry risk as well as positive potential. However, my investments will hopefully be capable of paying a larger passive dividend income later, perhaps when in retirement.
The post How I’d try to generate a passive income for life with just £25 a week appeared first on The Motley Fool UK.
Kevin Godbold 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