How I’d build passive income streams with £5 per day

With inflation in the UK at 10.4%, Fiver is not buying as much as last year. But I think investing £5 a day in the stock market can build a good passive income portfolio.

Buying shares in companies that distribute income as dividends allows investors to earn income from all different types of businesses. And sticking to some basic principles can produce good results.

Diversification

Saving £5 a day will get you an average of £152 to invest every month. And there are many places where you can work in the stock market.

Ultimately, I want a diversified portfolio, with income from multiple sources. This will help protect me from certain problems in certain companies or sectors.

Lloyds Banking Group, for example, can be good business. But if I put all my money into savings – or even into banks in general – I’ve had a hard time over the past few weeks.

In order to generate passive income, I think it is better to have a diversified group of investments. But instead of investing in various companies at the beginning, I will try to build this gradually.

Every month, I want to invest £152 in whatever I think is the best opportunity available at the time. It could be an oil stock one month, an insurance company the next, and a food company another time.

The important point here is that the only brokerage fee I pay is the foreign exchange (FX) fee. So there is no advantage for me to wait longer and invest less every year.

If I pay a fee per transaction, I won’t invest every month. However, I would like to buy shares every quarter, or once every six months to reduce costs.

That way, I will get a portfolio of investments in companies from different sectors, as well as different geographies. I will earn passive income from various sources, while trying to minimize risk.

Compound

The key to turning £5 a day into something significant is by reinvesting your dividends. As a result, I will use the income I receive to generate more.

I think that rising interest rates create some very good opportunities in dividend stocks. Aviva, Forterraand Rio Tintofor example, all have dividend yields above 7%.

If I reinvested the dividend at an annual return of 7%, the result can be quite significant. After 30 years, I will have a portfolio generating a monthly pre-tax income of £1,043, which I think will be a good return.

Dividends are not guaranteed and it is possible that some stocks may yield less in the future, of course. But diversification of investments is the best way to limit the risk of certain companies and industries.

I think history teaches us two things about investing in the stock market. First there is likely to be up and down over a 30-year period – times when prices are high and times when they are low.

The other is that buying shares in good companies produces good returns over time. It’s important to be patient, but sticking with the process can pay off in the long run.