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I am attracted to the idea of earning passive income. What's less appealing is the amount of work that goes into some supposedly passive income-earning plans.
That's why I prefer to earn income by investing in stocks with dividends. I can benefit from the success of large, proven companies without having to do the work myself.
This approach can be lucrative and doesn't require a lot of money up front. In fact, you could start with nothing and contribute a fairly modest amount on a regular basis to build up funds to invest.
Here's how you could do it on £5 a day.
Getting started and ready to invest
My first step would be to get into the habit of saving regularly. So I would look around and find the share trading account or stocks and Shares ISA that seemed most suitable to me.
Once I made my choice, I would start paying £5 each day.
Generate income streams thanks to dividends
That should mean he had more than £1,800 a year to invest. If I did that with an average return of 6%, my first year of savings should earn me almost £110 in passive income a year.
However, rather than withdrawing it straight away (which I could), I would prefer to reinvest the dividends into shares, plus £5 each day. By doing that, after a decade you should have a stock portfolio worth close to £25,000, generating just under £1,500 of passive income each year.
Finding the right stocks to buy
Is a 6% return realistic? I think it is, not just for a stock but as an average of a diversified portfolio. To illustrate the type of stock I would be looking for, I'll use one that is currently yielding well above 6%. In fact, the yield right now is 9.5%.
The stock in question is my property, that is M&G (LSE: MNG), the asset manager with a large client base and a proven business model.
When I invest, I look for markets that I believe will benefit from substantial customer demand over the long term. I think that's true for asset management. I also look for companies that have a competitive advantage. Again, I think that's true for M&G, with its strong brand and large customer base.
The company's focus is to try to maintain or increase its dividend per share annually. However, as an investor, I should be aware that no dividend is ever guaranteed. If there is a sudden market crash and people withdraw their funds, you could imagine that both M&G's revenue and profits would fall dramatically.
Still, the company is an impressive source of passive income for me and I hope it remains that way in the future. I have no plans to sell my M&G shares.
