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Earning money without working for it, in the form of share dividends, is a common passive income technique employed by the rich and very rich.
It is also something we poorer mortals can do, even with just a few hundred pounds to spare.
Different stock market millionaires each have their own approach to generating income. But here are a handful of things I observe quite a few of them do.
Taking a long-term approach
It is possible, even with a modest regular contribution, to set up sizeable income streams thanks to dividends.
But that does not happen overnight. Many millionaires have built their passive income thanks to taking a long-term approach when it comes to investing.
Letting dividends earn dividends, that then earn dividends
Part of that long-term approach can involve what is known as compounding.
Rather than taking dividends out as passive income (which could be done at any time), such an approach involves reinvesting them.
That gives an investor a bigger sum of money to put into dividend shares, hopefully enabling even larger income streams down the road.
Focusing on the source of dividends not their current size
A common mistake new investors – and some more experienced ones – make is getting dazzled by the large size of a particular dividend.
The thing is, no dividend is ever guaranteed to last. Now, some unusually large dividends do survive, while some small ones are cancelled. But rather than focus upfront on how large a dividend is, smart investors instead look at the source of dividends. They take a view on what a business’s likely prospects mean for its dividend potential in years and decades to come.
It’s not only about dividends
As an example of that, consider a share with a 10% dividend yield. That may sound like a potentially lucrative passive income idea – but what if the share price falls by a tenth each year too?
Savvy investors never focus only or dividends. They pay attention to total return – what does a share deliver when both dividends and share price movements are taken into account?
On top of that, what costs eat away at the return? Shopping around for the right share-dealing account or Stocks and Shares ISA can help keep dividends as income for the investor – not their stockbroker!
Buying brilliant shares
Of course, another vital factor is taking time to do some research and finding brilliant shares to buy.
One share I think investors should consider that may offer promising passive income potential is insurer Aviva (LSE: AV).
Insurance might not sound exciting – but that is what I like about it!
Aviva has a proven business model and more customers than any other British insurer. Its large business offers economies of scale, something that might be further helped by its planned takeover of rival Direct Line.
No dividend is ever guaranteed and Aviva cut its payout per share five years ago. Since then, though, it has been growing regularly. The current yield is 6.2%, so £1,000 invested today would hopefully earn £62 in dividends each year, even without growth.
Integrating Direct Line may distract management, which could be a risk to profits. On balance, though, I reckon Aviva is worth investors considering as they build passive income streams.
