I’d use £5 a day to start generating extra income for life. Here’s how

The idea of ​​earning some extra income to help with living expenses is exciting. I can do this with more work. But another approach is to generate passive income by benefiting from the hard work of thousands of employees in successful businesses. This is what I hope to achieve by investing my money in dividend stocks.

One thing I like about this approach is that it doesn’t take a lot of money to get started. It’s true that I couldn’t start anything and build an income-generating investment by putting aside a small amount of money every day. Here’s how I can do it on £5 a day.

Ordinary saving power

Getting into the habit of saving money regularly can set me on a rewarding path. The more I used to save, the more I didn’t realize that it wasn’t in my daily finances.

Meanwhile, money can accumulate and become the backbone of additional income plans. Putting aside £5 a day, I would be able to save £1,825 in a year. If I put it into shares with an average dividend yield of 5%, for example, I should get over £90 a year in dividends from my first year’s savings alone.

One thing I really like about dividend stocks is that when I own them, I get paid dividends as long as I hold them. So the money I put aside in the first year may still be generating income decades from now, or even in my lifetime.

To keep this money ready for investment, I set up a share-dealing account, or Stocks and Shares ISA.

Choose a stock to buy

Saving money is a key step in this plan – but I also need to invest. To do that, I will look for businesses that I hope will do well in the future, generating profits that can fund dividends. Of course, the unexpected can happen, so I will spread my investment across a few different companies.

When looking for investment ideas, I will look for companies that have a competitive advantage in a business area that benefits from large and resilient customer demand.

Tesco precedent. I expect grocery demand to remain high and supermarket brands and superior economies of scale to outperform competitors. In addition, the power network is operated by National Grid unique and I expect demand to remain high.

Buying shares in quality businesses is only part of the recipe for investment success however. I also have to consider the price when I buy. Paying too much for stock even in a large company may not make sense. This also means that my dividend yield is lower than if I bought the same stock at a lower price.

By purchasing a diversified portfolio of high-quality dividend stocks, I feel I can set up an additional income stream that will hopefully grow over time. I will keep putting aside £5 a day and buy more shares, to try to build my income.