Having money coming in regularly without working for it is the attraction of passive income. Among my favourite passive income streams are UK dividend shares. I like them because they typically pay out regular dividends and, instead of relying on my labour, they benefit from the efforts of large workforces at leading companies.
Here’s how I would look to use UK dividend shares to set up passive income streams which could pay me money within three months.
The principle of dividends
It’s helpful to start by making sure one understands what dividends are. When a company makes a profit, it can reinvest it in the business. But alternatively, it can pay some or all of it to shareholders as dividends.
That means dividends are never guaranteed. Some companies choose not to pay them, or simply can’t afford them. Other companies pay dividends but when the business stumbles, they cut or cancel them. Many businesses did that last year, from Aviva to Shell. That’s why I try to diversify my passive income streams by investing in a variety of companies across different business sectors.
Dividend timing
Some companies pay dividends annually, some twice a year, and others pay out each quarter. There’s no set pattern: some even pay monthly, while others can go years between dividends.
So, if I wanted to start earning passive income within three months, I’d look at a company’s dividend calendar. Many companies publish these on the investor relations part of their website. For example, if I look at National Grid’s dividend calendar, I can see that its next dividend is due to be paid on 19 January. But the payment date is not the only thing to look at. I also need to see the ‘ex-dividend date’. That is the date on which I need to own the shares to qualify for the upcoming dividend. In this case, it is 2 December. So, if I bought National Grid shares today, I’d expect a dividend within three months.
Payment timing can be important but I wouldn’t buy UK dividend shares on that basis. Instead, I’d focus on buying what I think are high-quality companies with strong dividend prospects. So I’d consider their likely future profits and free cash flows.
Putting passive income ideas into action
At that point, if I had spare capital, I would buy a diversified basket of shares and wait, hoping for the dividends to start rolling in.
But what if I didn’t have spare capital to invest? In that case, I would start putting aside what I could afford each month. Over time that ought to build into a pool of capital. Even if it seems quite small at first, I could still put it to work in the stock market with the aim of earning passive income.
Starting to put aside some money today, I’d hope to be earning passive income within three months. If I held my shares and they kept paying dividends, I’d expect to receive passive income from them for years to come.
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Christopher Ruane has no position in any of the shares mentioned. 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.
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