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My plan to turn £5 a day into a passive income in 2022

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I currently have investments separated into various pots. Some of them are designed to provide a passive income that take up little of my time. If I was starting my passive income investments from scratch, this is what I’d do in 2022.

First, I’d decide on an investment amount and decide what I’d like to achieve from it. For instance, how much do I want and how often would I like income payments? Also, I’d invest a realistic amount that I won’t need for any other spending or saving.

It’s possible to create a passive income from stocks and shares starting with just £5 a day. It’s a relatively small figure that can add up over the years. For instance, £5 a day equates to £1,825 a year and £9,125 over five years. Minimum investments have changed over the years too. Today many brokers allow me to invest in fractional shares. This means I can buy shares starting with a relatively small sum. But of course, £5 would be just my starting point and the more I invest, the more income I’d hope to receive. 

Passive income from dividend shares

The income I achieve also very much depends on my goal. If I’m looking for passive income every year, I’d look at investing in dividend shares. Many companies pay a portion of their profits to shareholders in the form of dividends. There are a few points to consider when investing in dividend shares. Every company offers a different dividend yield. That’s the percentage of its share price that it pays out each year. A company’s dividend payment is typically paid from earnings. As such, dividend payments can fluctuate. As share prices also move up and down, dividend yields can frequently change.

Currently, the UK’s largest listed companies in the FTSE 100 offer a dividend yield of around 3.5%. But as that’s an average, there are several companies that offer over double that figure. I like to focus on finding dividend shares that offer over a 6% yield (which beats inflation). Currently, just 13% of the companies in the FTSE 100 yield over 6%, so I’d need to do some homework to find and research them.

But the dividend yield isn’t the only component I’d look at. I’d want to pick companies that have the best chance of offering me a passive income regularly. That means companies with reliable dividends. Preferably, I’d also like dividend payments to grow every year. I reckon the very best companies might also have a good track record of paying dividends over many years.

Top picks for 2022

Ticking all of these boxes narrows down my watchlist a lot. Some of the companies that fulfil these criteria include BHP Group, British American Tobacco, Phoenix Group, Rio Tinto and Aviva. On average, these five companies have a 7.8% dividend yield. That’s pretty good, in my opinion.

A word of warning, however. Dividends aren’t guaranteed, and companies can suspend or reduce dividends at any time. During the height of the pandemic panic in March 2020, many companies suspended dividend payments due to uncertainty surrounding their earnings. Occasionally, additional or special dividends are paid from excess cash flow. Again, these aren’t guaranteed and are reliant on company earnings.

Overall, I’d say that by careful selection, dividends from stocks and shares can provide a wonderful passive income. As such, I’m preparing my pots for 2022.

The post My plan to turn £5 a day into a passive income in 2022 appeared first on The Motley Fool UK.

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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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.