There’s growing interest in passive income, and I’m certain it’s possible to generate meaningful income streams by committing to payments of just Â£20 a week.
But first, a reality check. ‘Passive’ doesn’t mean having to do nothing at all. Some work and effort is required to generate passive income in the first place.
And such income is often not immediate. After doing the initial work, we must often wait before the money begins to flow.
My king of passive income methods
For me, the best method for creating passive income is by investing money in stocks that pay shareholder dividends. As a quick reminder,Â dividendsÂ arise when a company pays out some of its profits to holders of its stock. And many companies make those payments twice a year. Some even pay ordinary dividends four times a year. And on top of that, companies sometimes pay additional special dividends to shareholders as well as ordinary ones.
When we buy and hold shares in companies we’re entitled to any shareholder dividends that business pays. And the money arrives in our share accounts automatically. So, after doing the work of researching and buying our investments, there’s often little else to do. Although it’s worth me bearing in mind that positive outcomes from investing in shares are not certain or guaranteed. And company directors have full power to decrease, increase or stop dividends whenever they choose.
However, I’d set up my programme of investing Â£20 a week into dividend-paying shares in five steps. The first step would be to open a share account with a reputable broker. And there are many that offer low-cost online dealing these days. My own provider happens to be Interactive Investor. But if starting from scratch, I’d shop for the best deals to suit my needs now. And I’d consider whether to open an ordinary share account, aÂ Stocks and Shares ISAÂ or a Self-Invested Personal Pension.
Doing my own research
Secondly, I’d research dividend-paying stocks and investments. For example, right now I like the look of companies such asÂ Unilever,Â Imperial BrandsÂ andÂ IG Group. And I’d also consider investing in aÂ FTSE 100 tracker fund for dividends.
Thirdly, I’d set up my Â£20 a week investment as an automatic transfer from my current account into my share account. For me, the best method is to make the payment monthly. And that works out at about Â£87.
These days, share account providers tend to offer the ability to make low-cost regular investments into popular stocks and funds. So, my fourth step would be set up that option so my money goes straight into the chosen investments each month.
And finally, my fifth step would be to automatically reinvest dividend income back into the companies I hold. In that way, I’d aim to build up my investments so they’re capable of paying a larger passive income from dividends later. It’s possible to do that by selecting the accumulation versions of funds and trackers rather than the income versions. And my share account provider offers a low-cost dividend reinvestment option for many popular stocks.
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Kevin Godbold has positions in IG Group Holdings, Imperial Brands, and Unilever. The Motley Fool UK has recommended Imperial Brands and Unilever. 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.