The prospect of earning money without having to work for it is enticing. But is it too good to be true? Depending on how one approaches it, I don’t believe so. Investing in dividend stocks, for example, is one of my favourite passive income ideas. I can earn without lifting a finger by owning a little portion of a major corporation that pays out some of its income as dividends.
Here’s how I’d use £40 every week to invest in dividend stocks and create passive income streams.
Build good habits
My first step would be to start saving £40 each week. I could start doing this by setting up a direct debit or by stuffing money into a piggy bank regularly. In any case, I believe that developing a habit of regular saving is critical to my passive income goals. That way, when additional financial pressures emerge, as they certainly will, I can concentrate on how to keep my monthly donations going.
Although it would take some time for me to accumulate a large enough balance to make investing beneficial, I would open a share-dealing account on the first day. That way, when I’m ready to start buying dividend stocks, I’ll be able to do it quickly.
Finding dividend shares to buy
As the pounds piled up, I’d spend weeks looking for dividend stocks that fit my requirements. I’d like to avoid some of the most typical blunders individuals make when they first start investing.
For example, let’s say I come across Ferrexpo (LSE: FXPO), which has a 12% yield. If I invest £1,000 in Ferrexpo shares, I should be able to earn around £120 each year in passive income. Not too shabby at first glance. However, upon closer inspection, there are certain dangers. Ferrexpo’s profits are centred on a single Ukrainian mining site. Its capacity to produce profits and pay dividends in the future may be harmed by its concentration of production in a nation with high political risk. Furthermore, the price of iron ore has an impact on its profitability. That explains why the dividend last year was more than 10 times more than it was four years ago.
Depending on my specific investment objectives and risk tolerance, Ferrexpo could still be a suitable choice for me. The idea is that before purchasing any dividend stocks, I need to conduct extensive research. I wouldn’t just look at a company’s yield without trying to figure out where the cash for dividends comes from. I’d look for stocks with strong business strategies that might potentially maintain or boost dividends in the future.
Passive income expectations
After saving £40 per week, I’d have £2,080 by the end of the year. So, if I invested in shares that yielded 5% on average, I’d expect to receive roughly £104 in yearly income in my first year. That isn’t a tremendous sum, to be sure. However, it might be the start of a series of realistic passive income sources for me. If I keep at this, week after week, year after year I can expect to have built a reasonable portfolio by the time I retire.
James Reynolds 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.
This post was originally published on Motley Fool
