Meaningful passive income for life. And all for the outlay of just £4 a day.
That’s a compelling idea that can be made a reality by investing in stocks and shares.
It’s not the only way to achieve streams of passive, unearned income. But it is certainly one of the most accessible for many people.
These days, investing in shares is straightforward and low-cost. There are many competing share account providers to choose between.
And execution fees can be low. That’s especially true for regular investments in the shares of popular dividend-paying companies and funds.
For example, my online broker and share-account provider offers a special ultra-low fee for steady monthly investments. And that’s a common practice.
Meanwhile, putting aside just £4 every day for investment will provide a monthly sum of just under £122. And that’s well worth putting towards the possibility of a better financial future.
For a passive approach to investing in stocks and shares, I’d focus on companies and funds that tend to pay reliable dividends. And I’d consider holding big names such as Unilever, National Grid, Imperial Brands and others.
Those dividend cash payments from companies represent a share of profits. And they can act as a source of passive income for investors.
Dividends can change
However, it’s worth bearing in mind that company directors have the full power to modify dividend payments at any time. Sometimes that means dividends tend to rise a little each year to reflect increasing earnings in a business.
But directors can reduce or stop dividends as well, whenever they choose. And they often do if a business hits a difficult patch of trading.
Therefore, it’s important to choose stocks and shares carefully. And that means conducting research to look for a consistent dividend record.
But research shouldn’t stop there. Strong dividend payments need to be backed by a strong and growing business. So, I’d look for robust cash flow, earnings and revenue.
And as well as the shares of individual companies, I’d consider investing in managed and tracker funds as well. One of the main advantages of funds is they tend to hold the shares of many underlying businesses. And that situation helps to ensure wide diversification in a portfolio.
Although it's always possible to take dividend income immediately, my approach involves reinvesting dividends along the way. And that’s because the practice can help to compound the value of a portfolio over time.
The idea is that aiming to grow the size of a stocks and shares portfolio can lead to bigger passive income streams later. And for me, that’s likely to be in retirement when I’ll need the money to use.
There are no guarantees of positive long-term outcomes from investing in stocks, shares and equity funds. But the stock market has a good reputation for outperforming the other major asset classes over the long haul. And my belief is it will likely do so again in the years to come.
My calculations indicate that investing £4 a day may generate around £60 of annual passive income from dividends. That's if investors can achieve a yield in the ballpark of 4% from dividend shares.
And although that figure is modest, it can build up to larger sums over the years if we keep on investing and compounding gains.
Regular investing has the potential to build meaningful passive income streams from dividends that can last a lifetime.
The post Lifelong passive income for £4 a day: here’s how! appeared first on The Motley Fool UK.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc and 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.