How I’d aim to start earning passive income for £15 a week

Some more money coming in is always useful – especially if it doesn’t take any extra work to earn it. That’s the thinking behind passive income. One of my favourite passive income ideas is investing in UK dividend shares. And here’s how I’d seek to earn passive income by putting aside just £15 a week.

The power of regular saving

I’d make a point of putting money aside on a regular basis, even if it was just a small amount as it’s habit-forming. To start earning passive income, I need capital and it’s encouraging to see it start to pile up through my disciplined habit of saving.

I actually think £15 a week is a substantial amount to save. Yet it’s just the cost of a few pints or a fancy coffee each day. Within a year though, it would add up to almost £800. That’s already enough capital to start earning passive income.

UK dividend shares

I’d put the money I was saving into an investment vehicle such as a Stocks and Shares ISA to take advantage of its tax benefits. Typically, trading in shares also attracts a charge, so I would wait until I had a lump sum saved to invest so that the charges of multiple trades didn’t eat into my funds too much. Then I’d make my first investment. Another benefit of this patient approach is that while it means I might be saving for a few months before buying any shares, I could use that time to learn more about the stock market and make a shortlist of UK dividend shares that seemed like good passive income ideas to me.

Staying cautious

Different investors have a variety of objectives and risk-tolerance levels. Someone with investments in dozens of companies has diversification. If one share does badly it likely doesn’t form a large part of their portfolio. Starting from scratch, I’d want to diversify as soon as possible but in the early days would still likely be concentrated in a small number of investments. So instead of being lured by shares that seem too good to be true, I would take a conservative approach. I’d want to focus my investments on large, well-established companies with sound finances.

One way to do this would simply be to buy an index fund. These track the broad market by investing in a basket of shares. That should hopefully earn me some passive income.

Individual passive income ideas

Over time, I’d turn to specific passive income ideas I felt matched my criteria. I wouldn’t just look at a company’s payout. I would also consider whether I think a company possesses a sustainable competitive advantage that could help support strong free cash flows for years or decades into the future. That matters because a company needs free cash flow to keep paying dividends, my passive income source.

Some of my own favourite passive income ideas at the moment include British American Tobacco and Legal & General. Both pay strong dividends, but also face risks. For example, increased competition could cut profit margins. That’s why, once I began buying individual shares, I’d be sure to diversify my portfolio. Then, I’d keep putting aside my £15 each week, sit back and hopefully watch my passive income streams grow.

Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.