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I’d use this passive income plan with £35 a week

With £35 a week to use, our writer gives an overview of his passive income plan that involves investing in dividend shares. The post I’d use...
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New Year’s resolutions might seem a distant memory now. But some people who started this year with the intention of generating income without working for it will already be reaping the rewards. I think it is never too late to start generating passive income. Here is a passive income plan I could start using today.

Using money to earn money

The plan relies on buying shares that would pay me dividends. To purchase them I will need money. If I do not have that money today, I could save it bit by bit. In this plan I would save £35 a week, although if I could not afford that it would be possible to start with a lower amount.

The key point is that I should get into a regular saving habit. Over time that can add up to a substantial amount. Indeed, within a year I would have saved over £1,800. That is more than enough for me to start buying dividend shares.

Dividend shares and the passive income plan

Dividends are basically a small slice of profit a company pays out to people who own its shares. Although the dividend is a set amount per share each time, as a passive income hunter I also need to consider what is known as the yield. If I pay £1 for a share and it pays me a 5p per share dividend, my yield is 5%. But if I paid £2 for the same share and the dividend is the same, my yield would only be 2.5%.

That makes a big difference. If I invest my first year’s savings of £1,820 at an average yield of 5%, I should get £91 of passive income per year. But if the yield is 2.5%, my annual passive income would be only £45.50.

So when looking for shares to buy, I would not just look at the dividend I expect a particular share to pay. I would also consider the share price – and what that means for my potential yield.

Finding shares to buy

So, how would I find shares with an attractive yield?

Well, actually I would not start by looking at yield. Instead I would first try to find businesses I expected to generate profits for years to come, that could fund dividends.  For example, I expect ongoing demand for supermarkets so would consider a share like Tesco. I feel the same about electricity distribution, so would also consider National Grid for my portfolio.

Only once I had found such companies would I then begin to consider their yields. Dividends are never guaranteed, so rather than just look at their current dividends I would consider how likely I think a company is to pay out at the same or higher level in future.

But I could make a mistake. Tesco profits might suffer as customers shift online, for example, or National Grid could need to spend more heavily than before on its infrastructure. So I would spread my investment across a diversified range of shares. First though, I need to find the right shares for my own investment objectives.

The post I’d use this passive income plan with £35 a week appeared first on The Motley Fool UK.

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More reading

As my current favourite FTSE 100 stock, I’m buying Barclays shares
How I’d invest £10,000 before the Stocks and Shares ISA deadline
The £20k ISA deadline is my chance to generate tax-free passive income for life
As the FTSE 250 is down 10% this year, is now a good time to buy UK shares?
8.2%+ dividend yields! I’d buy these 2 passive income stocks with £500

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

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© 2022 The Daily Encrypt. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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