As a fresh year approaches, it can be a good time to take stock of one’s financial position and set some goals for the coming year. I would like to boost my earnings in 2023 but do not necessarily want to work harder. That is why I will use a passive income plan for the year that consists of regularly putting money into dividend shares.
Doing that does not require any money upfront – and the contributions themselves can be modest. Here is how I would go about getting started for just £3 a day.
Start — and continue
I think an important part of investing is discipline. I need money to invest if I want to earn dividends. So having set the goal of putting aside £3 a day I would begin to do that from New Year’s Day. I think it makes sense to start as I mean to go on. I then need the discipline to stick to my regular saving goal.
I would save the money in a share-dealing account or Stocks and Shares ISA.
£3 a day may not sound like much. But it adds up to almost £1,100 in one year. That is enough to let me buy a range of dividend shares.
Finding shares to buy
How could I know which ones would suit my passive income plan, though?
I would stick to industries I understand, like Warren Buffett does. That gives me a stronger basis on which to assess a firm’s commercial prospects. I look for companies that have competitive advantages in industries with resilient demand, like Unilever and National Grid. I also then look at whether they can pay profits out as dividends or may have to use them to grow their businesses, or pay down debt.
Valuation matters to me, so I try not to overpay. For example, there are some income shares I would like to own some day, such as Judges Scientific and Diageo. I rate their businesses highly, but I think their current share prices are too high compared to what I feel those firms are worth.
The role of yield
Finally I look at dividend yield. That is basically how much a company pays out annually per share as a percentage of its current share price.
For example, if I invested £1,095 (my annual savings from this passive income plan) at a 4% yield, I should earn around £44 in annual dividends. If the average yield was 7%, the annual dividends should be close to £77.
Long-term passive income plan
That may seem like a small start, although it does show how my approach could start working for me in 2023.
But once I own the shares, I get any dividends they pay until I sell them. So in 2024, for example, I would hopefully still earn dividends from the shares I bought in 2023 as well as more recent purchases. In that way, over time, my regular saving of £3 a day should hopefully lead to growing passive income streams.
