My £2.50 a day passive income plan

I like idea of investing in dividend shares as a way to generate passive income streams. But what if I had no money to start investing? I actually think I could still begin, by putting aside a small amount of money each day. Let us say I wanted to begin with £2.50 a day. Here is the passive income plan I would use.

Focus on the goal

Putting aside a small amount of money might not help me generate a lot of income any time soon. But it could get me into the discipline of regular investment and also lead me to a deeper understanding of how dividend shares actually work in practice. Later, if I have more spare money, I could use that understanding to scale up my efforts – and hopefully my income too.

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So I would not begin with the mindset that £2.50 a day is too little to be worth investing. Instead, I would adopt the mindset that regular saving of any amount is the first step on my passive income journey.

Figure out how to buy shares

Simple as it sounds, buying shares does take some effort. For example, how could I actually buy them? Typically, I need to deal with a stockbroker – but first I may need to set up an account.

Millions of private investors own dividend shares already, so I do not think the process is particularly complicated. But I would want to do some research, for example into setting up a share-dealing account. It would take time for my daily £2.50 to add up to a big enough sum to make it worthwhile to start investing. I could use this time to get to grips with the practicalities of how I can trade shares once I am ready to do so.

Putting my passive income plan into action

Even among the ranks of dividend shares, there are many different types. For example, some pay a high dividend relative to their share price but are growing the dividend only slowly, like Imperial Brands and British American Tobacco. Others offer a lower dividend yield but the dividend is growing fast, like Judges Scientific and Halma.

Deciding what I want to focus on matters. £2.50 a day adds up to about £912 in a year. If I invest that in shares yielding 7.9%, like Imperial, my income the following year would hopefully be around £72. If I invest it in shares yielding 0.8%, such as Halma, my expected income would be only about £7.30.

But today’s yield is not necessarily indicative of what a company may pay in dividends down the line. For example, Imperial’s exposure to cigarettes at a time when smoking is becoming less popular could damage its revenues and profits. It already slashed its dividend two years ago and may do the same again in future. On that point, no company’s dividends are ever guaranteed, so I would reduce my risk by spreading my portfolio across a variety of companies and business areas.

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Christopher Ruane owns shares in British American Tobacco and Imperial Brands. The Motley Fool UK has recommended British American Tobacco, Halma, Imperial Brands, and Judges Scientific. 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.

This post was originally published on Motley Fool

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