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The idea of earning extra income is attractive – especially if it doesn’t come with extra work!
That’s why I regularly spend my money buying dividend stocks. Even if I start with no money, this can help me build passive income streams that can last for decades. Here’s how I implement such an approach by allocating £5 every day.
Little and often
The idea of investing five pounds a day may not sound like a great source of income. Admittedly, in the early years, my additional income would be modest. But a regular savings habit means that income streams can grow over time. Here is an example.
Imagine I invested my first year’s total savings of £1,825 in shares at an average dividend yield of 5%. That should earn me over £91 more that year. In the second year, doing the same, I hope he will buy another £91 worth of shares. But I should get a dividend of £91 from the shares I bought last year and still own.
Ten years from now, I should be earning over £900 more per year than my plan of investing £5 a day in this way. At that point, even if I stop putting in more money, I hope to continue to get that extra income for as long as I hold the shares.
But wait. What if I reinvested the units instead of cashing them out in the early years? That is what is known as compounding. Doing so means that the profiteers themselves can profit. After 10 years of compounding at 5% per annum, my £5 a day should have created a portfolio of around £23,000. I hope that will make a profit of around £1,150 every year. That’s an extra £5 a day and over £20 a week.
This example assumes that stock prices and dividends remain the same. In fact they can move down or up. But the principle is clear: compounding will help me grow future additional income streams.
Finding shares to buy
To implement this plan, I need to buy dividend paying stocks. Such payments are never guaranteed, even when a company has already paid them.
So how do I decide which stocks are best for my additional income goals? I focus on a company that serves a market that I expect to see long-term demand, with some competitive advantage. For example, I expect demand for insurance to remain high. Straight lineA brand name gives it a unique position in the market that helps attract and retain customers.
Now, the straight line yield is double the 5% I used in my example above, at 10.5%. Such a share means that I will get more income than I expected from above. But sometimes business is done better than expected. For example, a straight line may gain from inflation that feeds into profits in the second-hand car market.
This is why I spread my daily £5 across different companies. I just need to find the right ones for me!