Earning money without working for it need not be a pipe dream. Many people already do that simply by buying shares in blue-chip companies, sitting back and waiting for passive income in the form of dividends.
That approach does not involve me working, but rather it allows me to benefit from the hard work and commercial success of established large companies.
I also do not need a lot of money to start earning passive income streams that way. To illustrate, here is the plan I would use if I was able to spare just £3 a day on average to invest in shares.
How dividends work
The basics are indeed basic. If a company generates surplus cash, there are a number of things it can do with it, from investing in growth to piling up money for a rainy day. A common use is distributing some or all of it to shareholders in the form of a dividend.
Take Unilever (LSE: ULVR) as an example. The company owns dozens of premium brands from Domestos to Magnum. By selling those premium branded products in categories with strong ongoing customer demand, I think it ought to be able to generate sizeable free cash flows for decades to come.
The company uses that money to pay a dividend quarterly. Currently, the Unilever dividend yield is 3.7%, meaning that if I invested £100 in its shares today I would hopefully earn £3.70 in dividends each year.
In fact, if the company increases the shareholder payout as it has done in recent years, I could end up earning more.
Quality focus and risk management
Dividends are never guaranteed however. For example, if surging inflation eats into profitability, Unilever may decide to scale back or scrap its dividend at some point.
So when buying dividend shares for my portfolio, I do two things. First, I focus on buying shares in great companies that I think are attractively valued. Secondly, I never put all my eggs in one basket and instead, diversify my portfolio across a range of companies.
Setting up income streams
Doing that, the amount I ought to earn depends on how much I invest and what my average dividend yield is.
£3 a day adds up to just under £1,100 a year. Imagine I achieved a 5% average yield. That is above the FTSE 100 average but I think is achievable in the current market while sticking to blue-chip companies. That should earn me nearly £55 a year in dividends.
But if I keep holding those shares and they continue to pay dividends, they ought to be earning me passive income for years or even decades into the future. Meanwhile, I could keep putting aside £3 a day to invest in new shares.
That way, I would hopefully build growing passive income streams over years to come.
My first move? I would set up a share-dealing account or Stocks and Shares ISA to put my daily £3 into.
The post My £3-a-day passive income plan works like this appeared first on The Motley Fool UK.
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More reading
Invest a Stocks and Shares ISA to earn lifelong passive income? Here’s how!
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Unilever shares: the best bargain buy in the FTSE 100?
What’s happening with the Unilever share price?
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever Plc. 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.
