One of the most accessible ways to get passive income is to buy dividend-paying shares.
And putting aside £3.50 a day is a good place to start. It may not sound like much, but it’s the consistency of the approach that counts. And the money will soon add up.
Why I’d buy shares monthly
After a year of saving, I’d have £1277.50. And that works out at just over £106 each month.
But rather than saving up a lump sum, I’d invest monthly into dividend-paying funds and shares. My share account provider offers a free regular investing service. And others do as well. It’s a handy facility that allows me to make regular investments into each stock with as little as £25.
And that’s an ideal arrangement for my programme of regular investing. The money will be put to work each month and potentially earning dividends straight away. But drip-feeding money into the stock market like that means I’ll be buying shares at different prices from month to month.
It’s true that when share prices go up I’ll get fewer shares for my money. But if they go down I’ll get more. And investing like that rather than all in one go is known as pound-cost averaging.
One theory is that regular investing can be less risky and can help to offset the negative effects if the stock market goes through a difficult patch. But, overall, I think it’s a great way to proceed when I’m putting aside £3.50 each day.
Compounding my investment pot
However, I wouldn’t take my passive income from dividends immediately. Instead, I’d reinvest the dividends to help compound the value of my stock holdings. The goal would be to take a bigger passive income later when I need it — perhaps in retirement. And from then on, I’d have a passive income stream for life.
When investing in share funds and trackers, there’s often an option to choose the accumulation version. And that automatically reinvests the dividends at no extra cost. The alternative is the income version. And that pays the dividends into the share account for me to take. So I’d choose the accumulation version while I’m aiming to build up the value of my investments.
When it comes to individual dividend-paying shares, my share account provider offers a handy, low-cost dividend reinvestment service. So I’d opt for that. And in that way, there’s no need to worry about manually reinvesting the dividends that land in my account.
Meanwhile, there are loads of quality, dividend-paying companies that I’d like to part-own by buying some of their shares. For example, I like the look of energy company National Grid and smoking products maker Imperial Brands. And I’m also keen on trading platform provider IG Group.
There’s no guarantee that these businesses will go on to perform well while I’m holding their shares. However, I think they all have stable, cash-generating operations and would be ideal starter shares for my £3.50-a-day passive income strategy. And they could help to set me on the path to achieving lifelong passive income.