From a long-term perspective, one of the things I like about investing in dividend shares is the ability for my passive income streams to grow over time. As I put more money into them, my holdings will get bigger. But hopefully the dividends themselves may also grow. That is not always the case and indeed sometimes dividends are cancelled. But I reckon I can set up passive income streams with an eye to long-term growth, for £5 a day. Here is how.
Dividend shares as passive income ideas
Dividends are basically a share of the profits a company makes. So if the profits grow over time, the dividends will hopefully also grow.
That is why I sometimes invest in companies with dividends that are modest now but look set to grow in future. An example of a company I think has strong dividend growth prospects is fuel and computing conglomerate DCC. The company’s business model is highly cash generative. That has enabled it to increase its dividend annually for well over two decades.
Past performance is not necessarily a guide to what will happen next. But the company raised its interim dividend for the current year by an impressive 7.5%. At the moment the shares yield 2.8%, so if I invested £1,000 in them I would expect annual passive income of £28. But if dividend raises keep coming at 7.5% each year, then after 10 years my £1,000 should be earning £58 of income annually. Another 10 years after that I should be earning £119 in passive income per year just from the basic £1,000 I had invested 20 years previously.
Dividend growth or high yield
There is no guarantee that DCC will keep increasing its dividend, or if it does so that it will be at the same rate as this year. But I think the hypothetical example helps illustrate an important point.
Investing in companies that grow their dividends substantially could make for meaty passive income streams for me in future, even if the yield today looks middling. While I like Imperial Brands as a passive income idea, with its 8.1% yield, last year the dividend only grew 1%. So in the long term, its attractiveness as a passive income stock may decline compared to companies with fast-growing businesses that can support strong dividend growth.
Passive income streams for a fiver a day
In my example above, I talked about investing £1,000. That may be a lot. But if I put aside just £5 a day from today, I will have £1,000 to invest before the end of September.
Just as DCC’s steady annual dividend increases have added up over the past several decades, saving even £5 a day could soon start to add up. Within a year I would have over £1,800 that I could invest in setting up passive income streams.
I would spread the money across various shares to reduce the risk if one or more performed worse than I expected, which is always a risk. With £1,800 invested in dividend shares earning around a 4% yield – close to the FTSE 100 average – I would expect my passive income streams to be around £72 a year. Hopefully, with a long-term approach, they would grow from there.
The post How I’d set up passive income streams for £5 a day appeared first on The Motley Fool UK.
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Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.
