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Earning money without having to work for it? That is the idea of passive income. One common way people earn such income is buying shares in companies that pay dividends and letting them do the hard work.
Here, for just a fiver a day, is how someone could put that approach into practice and hopefully start earning money this summer.
1. Set up a share-dealing account
One first move could be to find a home for that £5 a day.
To that end, the investor could set up a share-dealing account or Stocks and Shares ISA, or sign up for a trading app, then start tucking the £5 away daily.
2. Learn about the stock market
Putting money into something you do not understand is not investment – it is speculation.
So an important step before spending a penny on shares would be to start the lifelong learning journey about how the stock market works. For example, how can one decide whether a share looks like good value?
3. Find shares to buy
Choosing shares to buy is an important part because it helps someone understand the difference between a great company and a great investment.
Each investor is different, even if aiming for the same goal (in this case, passive income). I think it is helpful to stick to what billionaire investor Warren Buffett calls a “circle of competence” when investing.
My own approach is to make a list of shares I would like to own, if I could buy them at what I saw as an attractive share price. In some cases, they may be available at that price now. In other cases, patience may be required!
4. Build a portfolio
Compiling a portfolio allows an investor to start building a diversified portfolio of shares they hope will pay dividends in future. Past performance is no guarantee of what may happen in future, including on the dividend front. So I would look at the underlying business and decide whether I felt it looked set to throw off enough spare cash to support future dividends.
For example, one share I think investors should consider is Legal & General (LSE: LGEN). Its track record of raising the dividend per share annually in recent years is impressive to me – and so too is the 8.7% yield. That means for every £100 invested today, an investor will hopefully earn £8.70 in passive income annually.
But that is not guaranteed, remember. The FTSE 100 financial services giant has reduced the size of its planned annual increase from 5% to 2%. I see a risk that the sale of a large US business could further reduce the company’s profits, hurting the long-term sustainability of the dividend.
However, Legal & General benefits from a large addressable market, strong brand and sizeable customer base. I see those as strengths.
5. Let the income flow
When dividends are paid (if at all) the amount varies share by share. Starting now, it is feasible that some could arrive before the summer is out.
Five pounds a day is £1,825 a year. At a 5% yield (more modest than Legal & General, but still above the FTSE 100 average), that would generate over £90 of passive income a year.
