How I’d build passive income with just £25 a week

When I started out as an investor in my late teens in 1986-87, I had precious little money to invest. Despite this, I carefully saved up my pennies to buy a few shares at a time. Over the years, I eventually built a portfolio — a collection of shares to generate capital growth and passive income (from share dividends). I’ve made every investing mistake under the sun over the past 35 years. So here’s how I’d start afresh now, building up a decent passive income starting with just £25 a week.

I’d save regularly (even small amounts work)

As a youngster, I splurged my pocket money and hence found it almost impossible to save. It was only in my twenties that I finally learnt the habit of saving regularly. This is the best way for most beginners to start building capital. Starting out with £25 a week today is roughly £100 a month or £1,200 a year. That’s more than enough to start learning about investing and making money. And, over time, I can save more and more as my income rises.

For me, property, bonds and cash are out

In this age of near-zero and negative interest rates, generating a decent passive income isn’t easy. Indeed, most savings accounts pay pitiful rates of interest. Also, after 40 years of rising bond prices, fixed-interest bonds (IOUs issued by governments and companies) offer ultra-low yields. And managing real estate (property) as a landlord is a chore, so these three asset classes aren’t for me. I’ll seek my passive income elsewhere.

I’d rely on dividend shares for passive income

Having rejected cash, bonds and property, I’d look to high-yielding dividend shares to generate my passive income. For example, 10 FTSE 100 companies are expected to pay cash dividends of £46bn in 2021. And dividend yields from these 10 top stocks range from 2.5% to 17.8% a year. However, I’d need to remember that unlike savings interest, share dividends aren’t guaranteed and can be cut or cancelled at any time.

I wouldn’t trade too often

The more often I trade, the more my fees and charges would mount up. Hence, I would buy shares fairly infrequently. For example, by buying only once a quarter, I’d have £25 x 12 =£300 to invest at a time. Also, buying only four times a year gives me plenty of time to read up and learn more about companies, markets and share prices. Yay!

I’d spread my risk around

On a few occasions in my life, I’ve invested far too much in a single share. And when my heavily owned stocks went crashing downwards, so too did my whole portfolio. Hence, if starting out today, I’d avoid this ‘concentration risk’ by spreading my money across multiple shares. This would avoid having too many eggs in one basket. Also, I’d spread my risk across various sectors, so I wasn’t overly exposed to too few industries.

I’d save tax with an ISA

Finally, having got into the good habit of investing regularly (and only after doing my research), I’d seek to maximise my net profits. Hence, I’d start investing inside a Stocks and Shares ISA to avoid paying tax on my sale profits and regular share dividends. Why give HMRC a share of my returns, when it takes none of the risks?

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.