I’d spend £50 a week to build an endless passive income stream

Sometimes you have to spend money to make money. Some people try to earn passive income without spending money, but it often takes a lot of time. For me, it is not passive. However, I put money away regularly and use it to buy stocks that I think will pay dividends.

This has some major advantages as far as I can see. At first, it was very passive – I just sat back and hoped for a profit. Second, the approach can allow me to benefit from hard work and proven business success, for example Vodafone or Microsoft. Third, I can save quickly, according to my financial situation. Fourth, I don’t need a lump sum up front to invest, unlike some passive income ideas.

Also, if I buy shares, I am entitled to any dividends paid if I own them. The unpredictable can happen, so I mix it up by buying a variety of dividend stocks. That said, if I don’t sell stocks, hopefully some passive income can keep coming in for decades. In theory, they can be infinite. That said, dividends are never guaranteed.

Make it a habit

If I start with an income target in mind – such as £1,000 per year – then I can go back from there to estimate how much I need to invest to achieve it.

Imagine I invest in shares that have an average dividend yield of 5% (in other words, they currently pay £5 per year in dividends for every £100 invested). To earn £1,000 a year, I would need to invest £20,000 in these shares.

I could do it in under eight years by saving £50 a week. If I don’t take the money as income along the way and combine it, I can reach my goal faster. Compounding is basically using income to buy other shares, so that at the time of the dividend, you will effectively get your own dividend.

This could help me reach my goals faster, but I’d rather not join so I can at least get some income from the first year of my plan.

What shares are good for passive income?

In deciding which stocks to buy, I look at the likelihood that they will pay large dividends in the future.

For a business that does, it must generate a lot of money. So I would look for a company like that Unilever or Coca Cola those who have a competitive advantage will find it hard to match. In that case, I think the unique brand provides that benefit.

I will also review the company’s balance sheet. If it has a lot of debt to pay, that means profits are being used for that purpose, not dividends.

Finally, I also consider the price. The price I pay for the stock will affect the dividend yield I get – and I want to find a bargain.