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How I’d use £25 a week to build a passive income stream from shares

A person holding onto a fan of twenty pound notes

Many stocks ended 2021 and entered 2022 performing well. In my own portfolio, several shares prices have been going up. And so have the FTSE 100, FTSE 250, and other indexes.

Fears about the Omicron variant of Covid-19 appeared to hit the markets in the autumn causing a braking action on stocks. But recent news suggests the disease caused by the variant may not be as severe as feared. And that’s even though the virus appears to be highly transmissible in its Omicron form.

That assessment of the situation could easily prove to be wrong. But I reckon the stock market is likely reacting to the news currently and investors could be judging the outlook to have improved for businesses.

However, I’d invest £25 a week into shares or share funds regardless of whether the market is up, down, or moving sideways. To me, regular investing is a worthwhile method of aiming to handle the volatility that stock markets tend to deliver.

Targeting rising dividends

If it isn’t Covid-19 affecting the markets, it’s something else. There’s always something to worry about. And that’s why people often say stock markets tend to climb a wall of worry.

But, for me, volatility is not a good reason for avoiding stocks. Over the long term, stocks and shares as an asset class have outperformed all other major assets, such as property, bonds, and cash savings. And I want to align myself with that trend even though there’s no certainty stocks will continue to outperform.

And when it comes to generating passive income, the dividends paid by many companies are hard to beat. One of the great things about dividends is they tend to rise as an underlying business prospers. But that doesn’t always happen. Company directors can raise, lower, or cut dividends as they choose. So, if a business underperforms, dividends could fall.

But I’m keen on owning a passive income stream from dividends because it has the potential to grow without further effort from me. However, with £25 a week to invest, I’d aim to reinvest my dividend income rather than siphoning it off straight away.

Compounding gains

The aim would be to build my investments up over years. And by compounding gains in that way I’d likely be able to draw a larger passive income from dividends in the future — perhaps when I’m ready to retire.

I’m using various stock investments with the aim of building up passive income. For example, I put money into Smithson Investment Trust, Finsbury Growth and Income Trust, and several low-cost index tracker funds. On top of that, I invest regularly in the shares of individual companies after careful research and consideration.

There’s no guarantee of a positive long-term outcome. All stocks carry risks. But I’m optimistic my regular investment regime will help to smooth out some of the volatility in my portfolio. And I’m putting my faith in the power of the long-term compounding process.

The post How I’d use £25 a week to build a passive income stream from shares appeared first on The Motley Fool UK.

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Kevin Godbold owns Finsbury Growth & Income Trust and Smithson Investment Trust PLC. The Motley Fool UK has recommended Finsbury Growth & Income Trust. 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.