How I’d start building passive income with only £50 a week

I was reading The Motley Fool’s personal finance site this week and came across an article on the UK’s average salary. It got me thinking: how much could I save based on the average salary? I wouldn’t want to just save though. I’d want to start building passive income with my salary. To do this, I’d want to explore where I could invest to create a diversified portfolio.

I then used a salary calculator to determine a reasonable weekly investment amount for myself. Based on the average UK salary of £25,971, I’d be left with a net £410 per week. Taking into account my other bills and expenses, I think I could save and invest £50 out of the £410 each week. This represents about 12% of the net average salary.

Now that I’ve calculated how much I could save, here’s how I’d start building my passive income stream.

Finding the right share-dealing account

The first thing I’d do before choosing my investments is find the right dealing account. There are many to choose from. I need to consider the fees I have to pay for the account, and any dealing costs. Ease of use and investment selection are also very important. The Motley Fool compares some online brokers here, and provides a star rating on them too.

I chose Interactive Investor for my share-dealing account. One of the key reasons was its free regular investing feature. I can invest as little as £25 per month, up to a total of 25 monthly investments through direct debit. This means I only need to consider the monthly account fee, and not any extra dealing costs with my £50 per week.

Dividend stocks

My preferred method of investing to build passive income is buying dividend stocks. I’d be a part owner of a business, and would get a cut of the profits as a shareholder.

The UK market is a great place to find dividend-paying companies with high yields, in my view. The large-cap FTSE 100 index has a forward yield of 4%, which is a respectable dividend income.

I can aim higher if I buy individual stocks. This is riskier though, as many things can go wrong with a business. Dividends may get cut, and then I’d lose my passive income stream.

Nevertheless, I’d set up a weekly £50 investment on my dealing platform to buy dividend stocks. Companies such as Legal & General, Aviva and Rio Tinto offer much higher yields than the FTSE 100 right now. I could switch which stock I bought every few months to make sure my portfolio became diversified.

Investment funds for passive income

One final way I’d consider building passive income is with investment funds. I could start with the iShares Core FTSE 100 ETF, which is an index fund that tracks the FTSE 100. As mentioned, the 4% dividend yield is still highly respectable, and I’d be diversified across 100 stocks immediately.

Another fund I use is the iShares FTSE UK Dividend Plus ETF. This has a 12-month trailing yield of 5.7% as it aims to pick high-yielding stocks. There are currently 55 holdings, so I’d be diversified more than if I bought single stocks here too.

Dan Appleby owns shares of Rio Tinto, Legal & General, Aviva and iShares FTSE UK Dividend Plus. 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.