Lifelong passive income for £10 a week? Here’s how

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A lot of people want to earn extra money without working for it – but they lack a practical plan to try and achieve that. One of my favourite passive income ideas is investing in dividend shares.

I like that approach because it really is passive. It also has the benefit of not requiring a lot of capital upfront. In fact, even if I was starting with nothing today, I think I could set up passive income streams with just £10 a week. Here is how I would go about it.

A little and often

Putting aside £10 a week may not sound like much. But in a year, that would add up to over £500. That could form the foundation of my income streams, even if they are modest at first.

I think it is helpful to get into the habit of saving regularly. Of course, life will throw up financial challenges from time to time that may distract me. If I have already got into the discipline of saving regularly, hopefully I would be better able to overcome such challenges without sacrificing my passive income ambitions.

I would save the money in a share-dealing account or Stocks and Shares ISA. So, when I am ready to invest, I should be able to do so immediately.

Dividend shares as passive income ideas

But what exactly do I plan to invest in?

What I called dividend shares above is just one way of describing stocks that pay shareholders dividends. A dividend is like a tiny slice of a company’s profits. They are never guaranteed: a company may not make a profit and even if it does, it can decide not to distribute it to shareholders.

In fact, that explains two key elements of my passive income plan. First, I would focus on what I thought a company’s dividend may be in future, not just what it is today. Second, I would use my weekly £10 to invest in a variety of companies, not just one or two.

Hunting for investment ideas

So, how could I find shares I hope would pay meaty dividends in future?

Instead of focusing just on the share, I would follow billionaire investor Warren Buffett and look at the overall business. Does it have a unique competitive advantage, like Coca-Cola enjoys thanks to its collection of brands? Is it likely to see resilient customer demand, like energy network operator National Grid?

After all, I am looking for a company that can make profits in future to pay as dividends. To do that, it will need a customer base and something to set it apart from competitors. I would also look at anything that could stop it paying out such profits as dividends, such as debt or high capital expenditure needs.

Finally, I would look at what is known as dividend yield. That helps me manage my expectations of what I might receive as passive income each year. For example, investing £10 a week for a year in shares with an average yield of 5% would hopefully pay me dividends of £26 annually. If I find promising shares and keep putting aside £10 a week, that may only be the start. Over time, I would aim to earn more by investing — without working any harder!

The post Lifelong passive income for £10 a week? Here’s how appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.