My Top Passive Income Plan at £3 a Day

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Passive income is money earned without working for it, and targeting dividend stocks is a good way to achieve that goal. But as the economic situation worsens, I have pondered what might happen if a recession hits businesses.

If I had £3 a day to lose, this is the passive income plan I would use to buy shares in blue chip companies.

The lure of blue chip stocks

Well-known companies with a long history can also struggle in times of recession. No dividend is ever guaranteed and even blue chip companies can reduce their payouts. Indeed, in 2020, I had Shell somewhat reassured by the fact that it had not cut its dividend since World War II. Despite this, the energy major went ahead and cut it!

But I still see good reason to consider investing in blue chip stocks when a recession looms. A company with a long history will likely have survived several recessions. This may mean that its business model is reasonably resilient.

For example, the difficult times in the gas sector have already seen some small suppliers go bankrupt. Fluctuations in energy prices can be difficult for large companies like SSE and United Public Services also. But they do have some strengths that many smaller competitors may not have, whether it’s a large customer base or experience in weathering previous recessions.

Save £3 per day

The core of my passive income plan is to buy dividend-paying stocks – which takes money. So I would regularly set aside a fixed amount in a stock trading account, or Stocks and Shares ISA.

£3 a day seems like an affordable amount to me. Over time, I was able to save and buy more and more dividend stocks. I hope this would allow me to benefit from the increased dividend streams.

If I stuck to my plan I should be saving around £1095 a year. Investing this in dividend stocks yielding an average of 5% would hopefully generate an annual passive income of around £55. Over time, if I continue to save and invest, this number could increase.

Putting My Passive Income Plan Into Action

Just saving money is only part of my plan. To earn dividends, I would have to invest it. Although I aim to buy stocks in quality companies, any company can encounter unexpected difficulties. So I would diversify my sources of passive income by buying shares in different companies.

To choose them, I would look for companies that offer products or services that I believe are likely to remain in demand, even during an economic downturn. I would look for a competitive advantage that could help a company make a profit, even in a crowded market. Importantly, I would also consider whether the stock price was attractive.

The higher the dividend yield, the more passive income I could earn. But the mere pursuit of yield can lead to future disappointment, if a company’s underlying business isn’t strong enough to support the dividend.

So when choosing stocks for my passive income plan, I always focused on a company’s business prospects. Only if it looked solid would I look at its dividend yield and decide if it might be attractive for my portfolio.

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