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Passive income ideas come in many shapes and sizes.
Some are new, but the old – a lot old – buys shares in businesses in the hope of receiving dividends.
That can be a way of turning even a fiver a day into a monthly income of hundreds of pounds.
Here is the way.
Start putting money aside regularly
The same approach can work for more money, or less. Earnings will vary as well.
But the important factor, whatever the value, is what it is consistency.
Building a habit of making regular donations can help set the stage for growing income streams.
Choose the right investment platform
At first, that £5 a day was simply put in a jam jar in the window.
Money can’t stay there forever, though, if it has to generate dividends. That will take dividend stocks – and a way to buy them.
So an early step in this income process would be to choose a stock trading account, Shares and Shares SA, or a trading app.
Learn what you need to know
Dividends are not guaranteed, even if the company has paid them in the past. Not only that, but buying dividend stocks that then go down in value can result in big money losses.
Therefore, it is helpful to understand important concepts such as the relationship between free cash flow and dividend and share value before starting to build an equity portfolio.
Combine now to get future income
It can feel great when the benefits start rolling in. But instead of using them, a smart move in the beginning would be to replant.
Doing so allows the portfolio to grow in size faster than it would with a constant contribution of £5 per day.
Compounding that £5 a day at 6% per annum for 25 years, the portfolio should be over £100k.
At that size, a 6% dividend yield would mean £500 of passive income per month.
Building a portfolio
An important step is to choose the stocks to buy.
6% is almost double the current rate FTSE 100 Express. I see it as achievable, but it’s important not to chase yield while ignoring risk. A large yield could be a sign that the City sees an opportunity for dividend cuts.
One share I think investors should consider already is a yield closer to 6%, at 5.7%. It also has an impressive track record of annual dividend increases over the past decades.
That share is a FTSE 100 tobacco producer British American cigars (LSE: BATS).
Past performance is not a guide to what to expect, although the company aims to continue to grow its profits every year. A drop in cigarette sales naturally means that the company’s revenue is going down – and that can be very bad.
Some may not want to invest in tobacco companies for ethical reasons.
However, there are many strengths of the company as well. It has strong products, efficient manufacturing, excellent global distribution, and a proven business model.
It remains a cash flow machine, helping to fund billions of pounds of income each year, in the form of dividends.
