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One of my favorite passive income ideas is buying blue chip stocks that can pay me dividends. That’s why I have several FTSE stocks with large dividend yields, such as british american tobacco Y vodafone.
Here’s an example of how you could try to build a four-figure annual passive income stream, for less than £10 a day.
Why FTSE shares
There are many actions I could choose from when trying to generate an income stream. But I would mainly focus on stocks in a FTSE index. Specifically, I would weight my portfolio towards FTSE 100 Share.
To enter one of these indices, companies must have a certain valuation. In and of itself that doesn’t mean they are a solid business (or a solid investment, which is not the same thing as that also involves the question of valuation). But reaching a certain size often means that a company has to have been doing something right commercially. So it may make sense to use that as a starting point before doing my own research to identify the right stocks for me.
Meanwhile he FTSE 250 contains fast-growing companies such as Prices, businesses in the FTSE 100 tend to be larger companies in mature industries. In fact, British American and Vodafone fit that description.
Since passive income is my goal, it suits me. Mature companies with strong cash flows and limited growth opportunities can be expected to pay handsome dividends. British American yields 7.1%, for example, while Vodafone offers 8.3%.
building a portfolio
However, both companies also have a lot of debt, which is a risk to dividends. All stocks carry risk, so to help reduce the potential impact on my income streams if I invest in a company that turns out to be disappointing, I would diversify my portfolio across several different FTSE stocks.
To choose them, I would look at the probable future income that I thought I could earn from them. At a basic level, that means considering your potential earnings, along with things that might prevent those earnings from being paid out as dividends, such as debt or capital expenditures needed to keep the business profitable.
Growing streams of passive income
Then I would start buying those shares. To do that, you would save £9 per day in a stock trading account or Stocks and Shares ISA.
Why 9 pounds? That would be an affordable amount for me, but it could add up soon. It would give me £3285 a year to spend on dividend shares. Investing that in FTSE companies with an average return of 5%, for example, should earn you £164 in annual passive income.
But each year I would save more, and therefore I should earn dividends on both my newly purchased shares and the ones I already owned.
If I were to reinvest the dividends, something known as compounding, that could help me reach my passive income goal even faster. Doing that and still assuming an average dividend yield of 5%, within six years you should already be earning over £1,000 in dividends a year!
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