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One way to earn passive income is simply to put some money towards buying shares in blue-chip companies that pay dividends.
That approach means I do not need to work hard to earn the money. Instead, I can benefit financially from the business success of large firms with lucrative competitive advantages, like Unilever or National Grid.
I would not even need to have saved any money upfront to set the ball rolling on such a scheme. Here is how I would aim to build passive income streams for £6 a day.
Put money aside like clockwork
Getting into a regular savings habit is at the core of my plan. So I would set up a share-dealing account, or stocks and Shares ISA, then get into the habit of regularly putting money in.
If I could afford £6 a day I could do that. But it is important to cut the clothes according to my cloth as everyone’s financial situation is unique. I would want to target an amount I thought was realistic for me. That would help me stick with the plan.
Learn about the stock market
Before plunging into the stock market, I would take time to learn about how it works.
For example, if some companies suddenly and unexpectedly do badly, how could I manage my risk? One technique would be to spend time learning to read company accounts and looking out for red flags. I would also plan to diversify my ISA across a range of shares.
A crucial concept to pick up before I start putting money down would be how to value shares.
Just because a company looks like it has a brilliant business, such as Apple or Microsoft, does not necessarily mean it will be a good investment. That depends on what I pay for it relative to its valuation.
Yield matters but is not the main thing
Not only is valuation important, but to earn passive income from my investments, I would need them to pay dividends.
Apple has a pretty small dividend yield right now, of 0.6%. Some FTSE 100 shares offer around 15 times as much.
But dividend yield alone cannot tell me whether a share is a good fit for my investment objectives. Dividends are never guaranteed and companies such as Shell and Direct Line have all cut theirs in recent years.
So I look at the underlying business strength and try to understand if a company looks well-positioned to throw off excess cash in coming years that it will not need for some alternative activity like paying down debt.
Target in sight
Saving £6 a day would give me £2,190 each year to invest. If I invest that at an average dividend yield of 7%, my first year’s investments alone will hopefully earn me around £150 in passive income each year.
Over time, as I keep up my regular saving and investing, hopefully my dividend streams will grow.
