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How to earn passive income in 2023 with just £50 a week

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One of my top priorities in 2023 is making passive income from dividend stocks. Investing in companies that pay shareholders regular distributions is a great way to boost my earnings with minimal effort required.

However, it does require discipline to regularly save and invest, not to mention an ability to stomach potential share price falls. That’s why I like to create a clear plan that I can stick to — even when the going gets tough.

So, here’s how I’d target dividend income from the stock market with just £50 a week.

Weekly savings

To start my passive income journey I need money to invest. So, should I just invest all my savings into the stock market?

I’m not too keen on that idea as I like to keep an emergency fund in cash. That means I can invest with a long time horizon and I won’t be forced to sell my stocks when the market inevitably enters downturns along the way.

Therefore, as I’m leaving my cash savings in the bank, I’d set myself a goal of putting aside a little over £215 to invest every month from my paycheque. That equates to £50 a week.

I think that’s an attractive goal for two reasons. First, it’s achievable. Second, by regularly drip-feeding small amounts into the stock market I’d reduce my exposure to volatility risk.

Tax optimisation

Next, I need to decide what vehicle I’d use for my investments. Capital gains tax and dividend tax allowances are both due to be reduced over the coming years.

Accordingly, to maximise my returns and minimise my tax bill, I’d invest in a Stocks and Shares ISA.

To limit my trading costs, I’d use a commission-free broker like Freetrade.

Dividend stocks

Now I’m ready to start buying dividend shares. Fortunately, there are plenty to choose from in the FTSE 100 and FTSE 250.

I’d carefully conduct due diligence on all my investments, making sure I’m familiar with the business models and risks facing each company. After all, one of Warren Buffett’s key investing rules is never to invest in a stock he doesn’t understand.

Good examples of income-producing shares that I own include Dividend Aristocrat British American Tobacco, which sports a 7.07% yield, and Britain’s largest supermarket Tesco, which offers a 4.42% yield. I also have a position in housebuilder Taylor Wimpey, which yields a massive 7.86%.

Of course, there are company-specific and macro risks facing each of these businesses. That means none of their dividends are guaranteed.

However, by diversifying my portfolio across different companies and sectors I hope to secure reliable passive income streams from at least some of my investments should any individual firm encounter difficulties.

Compound returns

Let’s imagine I secured a 7% yield on my portfolio and reinvested my dividends into more stocks within the ISA wrapper.

In reality, that figure could be higher or lower depending on how my stocks perform, of course — but I’m assuming my positions experience no share price appreciation in my calculations.

If I invested £50 a week, my portfolio would be worth more than £266,250 after 30 years. That shows how investing little and often can potentially reap great rewards for a long-term investor like me.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The post How to earn passive income in 2023 with just £50 a week appeared first on The Motley Fool UK.

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Charlie Carman has positions in British American Tobacco P.l.c, Taylor Wimpey Plc, and Tesco Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and Tesco Plc. 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.