My £8 a day passive income game plan

The sensation of passive income is money coming in without having to work. However, like many exciting ideas, they can be difficult to bring to life.

My own approach is to keep it simple. Large companies with proven business models are often able to generate consistent profits. By buying these shares, I hope to receive some of these profits in the form of dividends. They form a passive income stream.

The approach doesn’t require a lot of money up front. In fact, I can apply it in a fairly small amount every day. Here’s how I’ll spend £8 a day.

Save regularly

I can start with a lump sum if I have it.

But I think there are benefits to regular, structured savings. It will help me get into the habit of putting money aside in a disciplined fashion.

Putting aside £8 a day means I’ll be saving £2,920 a year to invest with the aim of earning passive income. To do that, I would use a share-dealing account or a Stocks and Shares ISA.

Pick dividend stocks to buy

Not all companies pay dividends. Who chooses how much to pay. In addition, dividends are not guaranteed even if the company has been paying for decades and has been profitable.

By focusing on buying stocks to generate passive income, what does it all mean?

First, I don’t focus too much on a company’s dividend history, but try to pick stocks based on what I think is their future dividend potential. Second, I diversify by spreading my money across different stock options.

Looking for dividend potential

That may sound good in practice, but how do I decide whether my shares have strong dividend potential?

Basically I’m looking for a company that has a strong business and doesn’t need to reinvest all the profits. So, if a business has a competitive advantage in an industry that I expect will see strong demand in the future and does not need to invest more money into growth or expensive expenditures like developing new markets, it will be a candidate for my portfolio.

As an example, discount retailers B&M it has a proven retail formula, a loyal customer base and can cut costs if necessary by keeping stores in less than perfect condition. For discount retailers, gleaning stores is not a priority for customers.

Grow your passive income stream

The dividend yield at B&M is 3.5%. That means if my first year savings of £2,920 were invested in B&M and other shares with similar returns, I should have made a profit of over £100.

Other stocks have higher yields, so depending on my choices, I can expect to get a bigger passive income. If I pick a good one, I hope the stock dividends I own will increase over time (although that may happen).

If I take the time to choose a great company when the shares are selling at an attractive price, hopefully I can turn every day £8 into a lot of passive income streams.