How to create a passive income
Well, after nine years on my own personal investing journey, I am pleased to confirm it is a lot easier than I thought to generate a passive income from dividend investing.
I taught myself, I am not degree educated and just went to a normal secondary school.
Annually in 2023 I earned £4,170.18 equivalent to £347.52 per month from dividends
At the end of 2023 the portfolios total income had surpassed £22,200.70 in eight and a quarter years
Dividend Growth investing using top global stocks
We do not need to be a rocket scientist, stock brokers or even degree educated to manage our money in order to create a regular income from dividend investing.
In todays’ modern world of investing it is easier than I initially thought due to the easy access of data and information.
Whilst juggling our busy daily lives there seems increasing demands on our time, however stock market accessibility today is much easier, thanks to improved technology like smart phones, laptops or tablets.
As the world revolves around us we all have the ability to quickly check our trading accounts, buy and sell shares all on our mobile devices which is extremely convenient when managing our investments.
Whatever the goal that you are aiming for, I hope that you will have confidence in building your own starter portfolio and creating your own financial freedom.
Most of us manage our money in ways we do not even consider like when buy groceries, renewing our mobile phone or broadband contracts, insurance plans to cover our lives, cars and homes.
We all make decisions regarding the money we spend on a daily basis, so why do we not all manage our savings or investments as thoroughly?
Some of this is down to the fear or lack of understanding regarding investing in the brands and businesses that we buy & use products from on a daily basis.
Example of $50 dollar investment & returns
To see how easy it is in creating your own portfolio let me demonstrate how little you would need to invest and how soon & easy it would be to start seeing the dividends drip into your account.
So let’s take my friend for example who’s we’ll call Herbert.
Herbert wants to start investing and has a plan to start saving $50 per month for the first two years.
Herbert contributes $50 for the first 6 months before he even invests into any stocks as he’s aiming to build his first $300 to invest.
During this time Herbert starts to plan which stock his first investment will be, he’s found an equity costing just $1.10 but after research he sets his initial price and plans to purchase the stock for 99 cents, that way he’ll have enough for 300 shares.
Over the last half of the first year the portfolio receives just two quarterly payments of dividends, during year two the same equity will provide another 4 quarterly payments.
By the time year two arrives Hertbert has also managed to save another $300 to purchase the next lot of shares. This time he finds another business and these shares are similarly priced around $1 per share.
At the beginning of year two Herbert invests and purchasing another 300 shares, which in year two will provide 4 quarters of dividend payments.
So by year two there are just two stocks paying 4 quarterly payments, leading to each half year saving an additional $300 for the next trench of shares to buy.
After 5 years the annual dividends are starting to mount, by continuing to combine these dividends with regular savings this increases Herberts buying potential, as there are more funds available.
This ever increasing cycle will continue steadily increasing income and potential for the portfolio to grow.
The assumptions for this starter portfolio are based on two renewable stocks prices each at $1.00 and one consumer staples stock priced at $30+ per share.
1, Monthly savings of $50 per month for years 1 & 2
2, Monthly savings being increased to $55 for years 3 & 4
3, Monthly saving being increased to $60 in year 5
4, Dividends PA increase between 3-3.5%
5, During this 5 year period Herbert increases his holdings within the portfolio, based on just three starter stocks
Please see the chart below based on just three stocks.
Planning & research is key:
Before you start building a great portfolio of stocks planing is key.
Firstly, start by looking to select 10 quality global business to ensure diversification, so you are not investing in just one stock or not putting all your eggs in one basket.
Only buy businesses or stocks that you understand, consider companies whose products you use i.e. food, drink, cleaning products, cars, electronics.
Secondly, the key to good stock selection is to research companies checking for consistent dividend growth.
Avoid just selecting high dividend companies as generally this can be a warning sign. Any business giving away all their profits could be unsustainable.
Here are a few good examples:
- Proctor & Gamble
- Colgate-Palmolive
- Coca-Cola
- Cummins
- Diageo
- Unilever
- Broadcom
- Pepsico
- Shell
- Microsoft
- Apple
- Samsung
This list is too exhaustive but I trust that you are getting my point.
(The above list is not a suggestion to invest in any of these businesses, I am purely points out familiar brands you may know and trust).
These companies are making millions in profits from products we buy and use on a daily basis.
Why should we just enjoy the products?
Ten years ago I thought about enjoying the profits from the dividends they pay out annually, bi-annually, quarterly.
Should you be considering starting a passive income through dividend investing, then there are plenty of resources available.
Below:
On this page you will find quick links to websites I use to research my own investments.
Still unsure, then do not start but consider this:
Set up a spreadsheet of the stocks you want to buy, include quantities, dividends and set your starting price to buy these equities.
As they say do a dummy run with no cash invested, just on paper.
Most trading platforms offer the ability to start a virtual portfolio before you even invest a penny.
Then in 1 year come back to the spreadsheet and see if the income was in fact generated and consider what you would have received in dividends.
Then maybe you will have the confidence to start in the future. Only start when you feel confident and happy with your abilities.
If you are still unsure and not happy at this stage, then possibly buy funds from your selected platform to spread your risk.
Suggestion: speak to a qualified advisor as investing in individual stocks & shares is not for everyone.
Some individuals prefer funds and let the funds managers handle the day to day buying and selling, research etc.
When you are ready then here are my 10 simple steps to help get you started:
1, Open a stocks & shares ISA or SIPP – Top trading platforms link – click here
2, Choose some quality dividend shares that you would like to hold in your portfolio
3, Research UK dividend payers (FTSE 100 – FTSE 250)
4, Research Dividend Kings – Click here to go to Dividend.com
5, Research Dividend Aristocrats – Click here to go to Dividend.com
6, Research & set purchase prices – Click here to price & valuations for help
7, Set buying orders on your chosen platform for each stock or equity
8, Sit back & relax, when the price on your purchase order executes you will own the stock
9, Set up a regular monthly savings amount into your ISA or SIPP
10, Collect the dividends
Congratulations, you have started to build your own portfolio and income stream from dividends!
Keep building on these foundations to generate wealth through compounding the interest.
Now that you have started your portfolio, as you build in confidence it is extremely easy to build upon.
Just repeat again with the dividends earned combined with your regular savings.
Points to keep in mind:
1, Remember with investing its a long term plan minimum 5 years +
2, Keep emotions out of your decisions (Set price parameters)
3, Ignore the white noise of the media & stock markets – think long term
4, It can be addictive as you will want to build more dividends when you reap the successes
5, Remember – enjoy it!
Congratulations as you have now started to generate a passive income!
Thanks for reading & happy investing!
