For me, generating passive income is what investing is all about. But I don’t need huge amounts of cash to get started.
Investing in dividend stocks allows me to receive regular cash payments that I don’t have to work for. And I could get started investing with just £2.50 per day.
Obviously, the more I invest, the more I stand to gain. But here’s how I’d build a passive income portfolio with small, regular deposits.
Building a portfolio
The first thing to note is that £2.50 per day can add up quickly. Over a year, that’s £912.50 available to invest.
Doing that for 30 years means investing a total of £27,375. That’s a significant sum all by itself.
The key to generating passive income, though, is investing in companies that distribute their earnings to shareholders.
By reinvesting the dividends I receive, I can grow my portfolio much more quickly. Alongside the regular £2.50 that I’d put aside, that would allow me to build a meaningful portfolio.
To get started, I’d look for stocks that have high dividend yields. These can be risky, since a high yield can be a sign that a company’s payments are unsustainable.
Dividend stocks
I don’t think that this is true of every stock with a big dividend yield, though. And there are some in the UK that I think are great choices right now.
The first is Lloyds Banking Group. I think that this company can do very well as interest rates rise and that its dividend is likely to grow over time as a result.
Another is Legal & General, which has an excellent record of maintaining its dividend payments. At the moment, the stock pays a dividend yielding over 8%.
Lastly, I’d buy shares in Shell. The company has a policy of returning its profits to shareholders while also investing in the transition to renewable energy.
Passive income
What could I expect to achieve by investing using this strategy? That depends on how well my investments do, but I think I could achieve a return of between 4% and 8%.
If I achieve an average return of 6%, then I’d have a portfolio worth £72,115 after 30 years. And a 6% dividend would provide me with £4,030 in annual passive income.
Of course, things could go less well. If I only achieve a 4% return, then I’d have a portfolio worth £51,157 that paid me £1,932 annually without me having to do anything.
But if things went better and I achieved an 8% return, then things could really take off for me. That would give me a portfolio worth £103,339 paying £7,585 in dividends.
There’s always risk associated with investing in stocks and returns are uncertain. But I could absolutely generate meaningful passive income with £2.50 per day.
One of the most important things about this strategy is that I continue to invest for a long time. So if I were looking to pursue it, I’d be getting started straight away.
The post Start generating passive income with £2.50 a day? Here’s how I’d do it appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.