I’d set up a lifelong passive income by spending £10 a week on shares

Passive income is money that I earn without having to work. This may sound like fantasy, but in reality, it is a practical financial technique used by millions of people.

For example, one approach to earning passive income is to build a portfolio of stocks that will hopefully pay dividends in the future. Dividends are money that a business makes that it chooses to pay out to its shareholders.

I like this approach because I can use whatever spare funds I have based on my own financial situation to benefit from the success of a big blue chip name business.

Here’s how I would implement the plan if I had £10 a week to spend.

Prepare to invest

My first step was to set up a stock trading account, or Stocks and Shares ISA.

I can start putting the regular £10 into that straight away, so that once I have enough saved up and identify some shares I want to buy, I will be ready for action.

Saving ten ten weeks would give me £520 a year to invest. I think the discipline of regular savings also helped me build healthy financial habits.

Choose a stock to buy

Next will be finding dividend stocks that I like. Not all companies pay dividends, although they have done so in the past. This year, for example, Direct Line suddenly axed its shareholder payments.

That helps explain why I always diversify my portfolio in different businesses. But I also do my own research and try to find attractively priced stocks that I think offer strong passive income prospects.

Part of that involves finding companies that I think have a long-term competitive advantage in areas that I think customers will want. Consumer goods company Unilever precedent. there is only one Marmite (regardless of what Australians may claim about the local equivalent, Vegemite), meaning the owner of the Unilever brand has pricing power. It can charge a premium for dark yeast extract and many loyal customers will still pay that price.

But just finding a business that looks like it’s still generating healthy profits doesn’t mean I’m going to buy the stock. Few companies are as successful as the owner of Google Alphabet reinvest profits in the business instead of paying them out as dividends. I own Alphabet stock, for the growth potential. But if my focus was on maximizing passive income, I wouldn’t choose to buy.

Price is also important. Even a strong business can be overpriced. Paying too much for a stock can be a bad investment, even if the company does well in the future.

Dividend yield

The price I pay is also important because it helps determine the dividend yield. Yield Basically the dividend I get each year is expressed as a percentage of what I pay.

If I invest £520 with a 5% return, for example, I expect to get £26 in annual passive income.

Over time this can grow – I will still contribute every week when my shares have been able to raise dividends. Some may be cut off, but with a carefully selected range of businesses, they can hopefully generate income for decades.