It’s not always easy to put money into building a passive income. Fortunately, even with a modest amount, like £10 a day, I can begin earning extra money. And best of all, I wouldn’t have to work for it.
That understandably sounds too good to be true. Yet, it’s precisely how dividend stocks help prudent investors earn a second salary. Let’s explore how in three simple steps.
1. Save regularly
Saving £10 a day equates to having a spare £280-£310 at the end of the month, depending on the time of year. And by putting the money initially in a high-interest-bearing account, some extra money can be earned while deciding on which dividend shares to buy.
Sometimes, that means sacrificing some everyday luxuries. But in the long run, they pale in comparison to a thriving dividend portfolio that can offer far greater rewards.
2. Choose wisely
Not all stocks pay dividends. Typically, it’s the larger enterprises that give payouts to shareholders to compensate for the lower level of growth potential. And that usually comes with the added benefit of stable earnings to fund dividends as well as a less volatile share price.
The London Stock Exchange is filled with income-paying investment opportunities. And looking at the FTSE 100, the average yield’s around 4%. In other words, for each £100 invested, that’s £4 of passive income earned each year.
Considering that it’s currently on par with savings accounts, it begs the question of why investors should take on the extra risk of the stock market. The answer is, if picked wisely, dividend stocks raise shareholder payouts over time. So a 4% yield today could grow significantly in the long run, while savings accounts will almost always remain in line with interest rates set by the Bank of England.
Of course, the keyword here is ‘wisely’. Just because a business pays dividends doesn’t mean it will continue to do so. Remember, dividends are a means of returning excess earnings back to shareholders. And if there are no excess earnings, a company will eventually be unable to maintain its payout, let alone expand it.
3. Buy and hold for the long run
Since I’m targeting a passive income for life, I’m looking for a dividend stock to buy today and hold for years, or even decades, during which it will hopefully continue to hike payouts. Looking at my own income portfolio, one business that seems to fit that bill is Safestore Holdings (LSE:SAFE).
The self-storage enterprise has already had close to 15 years of dividend hikes under its belt, thanks to its rise to dominance within the UK industry. However, with the lion’s portion of the UK market share already in its pocket, management’s now started expanding internationally into Europe to replicate its success abroad.
If successful, the dividend hikes seen to date could be just the tip of the iceberg. After all, Europe’s a much larger market. However, success is never guaranteed. Since the self-storage industry in places like Germany’s far less developed, Safestore will likely have plenty of challenges to overcome along the way.
Nevertheless, given its track record, I’m willing to give it the benefit of the doubt for my passive income stream.
This post was originally published on Motley Fool
