The end of the year often brings extra costs. It’s at moments like these that some passive income streams could come in handy. Putting aside just £3 a day, starting today, I could hopefully already have passive income streams in place by the time December rolls around again next year. Here’s how.
The power of regular saving
Putting aside a set amount on a regular basis would help me develop personal discipline. So when other things came along on which I could spend that money — as they always do in life, sooner or later — I would already be accustomed to sticking to the regular saving habit.
Three pounds a day soon adds up. Within a year, I would have saved over £1,000. But having that money piled up in a drawer won’t earn me passive income. I’d need to do something with the money I was saving. One option would be to put it in a bank account. But an alternative I prefer for income generation potential would be to use it to buy shares I think might pay me a dividend.
What are dividend shares?
Dividends are a portion of a company’s profits paid out to shareholders. Dividends are never guaranteed. But some companies typically pay them while others don’t. Often a company has a stated dividend policy in which it sets out its plans for dividends. That is a good place to start when looking at whether a company might pay dividends in future, although that will still depend on the decision of the company’s directors.
I look at how much free cash flow a company is expected to generate in future. That gives an indication of its likely ability to pay dividends, just as its dividend policy sets out its will.
Why I like dividend shares as passive income ideas
With a few pounds a day I need to be realistic about what I can do to generate passive income. Buying shares even on a small scale can give me direct exposure to large companies such as BP, HSBC, National Grid, and Direct Line. So I can benefit from their established business, management expertise, and business models. Each currently pays a dividend, as do hundreds of other listed firms.
That means I can sit back and do nothing at all other than keep putting aside my three pounds each day. Even the best run company can run into unexpected difficulties, though. So I would reduce my risk by diversifying across a number of companies in different sectors. With £3 a day, I would have enough funds to invest a bit more than £250 each quarter. So if I started today, I could already hold a portfolio of dividend shares in four different companies a year from now.
I’d start today
Some people try to time the market and buy shares at their lows. But that’s difficult to do in practice. If my objective is passive income, I would simply invest regularly and build up my earning streams.
So while I might not always buy shares at their lowest prices, I’d be putting my money to use and hopefully start earning passive income in short order. Rather than waiting, I’d start by taking action and putting aside a few pounds today.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.