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Earning passive income does not have to be difficult or involve ambitious schemes to set up new businesses.
My own approach is the opposite, in fact.
I aim to let the hard work fall on proven businesses that have long since established how lucrative their activities can be. By buying shares in blue-chip companies I hope to benefit from their capability to generate profits in future.
Specifically, I hope that I will earn dividends.
Unlike some passive income ideas, this one does not require me to have lots of money upfront to set the ball rolling. Here is how I could aim to put it into action for £3 a day.
Saving to invest
Putting aside £3 each day would give me £1,095 to invest in dividend shares annually.
As well as giving me funds to invest, I think a regular saving habit would be a good one to develop.
Rather than just putting the money under a mattress, I would set up a share-dealing account or Stocks and Shares ISA. That way, I would be ready to invest as soon as I found some shares I thought looked right for me.
Finding shares to buy
But what sorts of shares might help me generate the sort of passive income streams I want?
Many investors look at the dividend history of a company. But dividends can be cancelled or cut at any time, so a firm’s track record is not necessarily an indication of what will happen in future.
Instead, I look at whether a business has the sort of characteristics I think will help it throw off lots of spare cash it can use in future to fund dividends.
For example, there is only one Guinness. That lack of direct competition gives pricing power to the stout’s manufacturer Diageo. The group is solidly profitable and has raised its dividend annually for over three decades.
Building a portfolio
Although I like Diageo, I do not own the shares in my portfolio.
Why not?
When investing, I look for an attractive business. But I also aim to buy shares at what I see as a good price. Many other investors clearly feel the way about Diageo I do, meaning its share price is often higher than I am willing to pay.
Share prices matter for passive income because of something known as dividend yield. That is basically the income I would hopefully earn each year from a share expressed as a percentage of its purchase price. For example, a yield of 5% means I should receive £5 of dividends annually for each £100 invested. As a share price goes up, if the dividend amount remains the same then the yield falls.
In today’s market, I think it is possible to build a portfolio of blue-chip FTSE 100 shares that would earn me an average yield of 7%. No matter how much I liked one share, I would build a diversified portfolio to help reduce my risk if one share did poorly.
That ought to earn me almost £77 in passive income annually.
If I kept saving my £3 daily to invest, over time hopefully my passive income would grow into hundreds and ultimately thousands of pounds per year.
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