There’s no time like the present is an age-old saying. And this especially rings true when it comes to generating passive income. I know the longer my money is in the stock market, the better chance I have of building wealth.
Making extra cash with little to no work may not seem viable. But by buying dividend shares, it is. This is something that I’ve done for years now. With the extra cash I receive from my dividends, I take it and reinvest it back into my nest egg.
Here’s how I’d go about building streams of passive income for life.
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Selecting the right companies
The first thing I’d do is decide where I want to invest my money. For me, that’s UK shares.
I say this because I see plenty of undervalued shares in the UK market right now. What’s more, they also offer the meatiest yields. For example, the average FTSE 100 yield is around 4%. The FTSE 250’s is 3.5%. Both of those beat the S&P 500, whose members yield around 2% on average.
Playing the long game
What’s also key is remembering the bigger picture. There are a few reasons for this.
Firstly, the stock market has proven over time that investing for the long term is the best way to benefit from it. With every investment I make, I intend to hold it for a minimum of five years.
On top of that, playing the long game also allows me to reap the rewards of compounding. This is a method that will allow me to grow my pot quicker, and it essentially means that I’ll be earning interest on my initial investment as well as the extra cash I receive. Warren Buffett has talked of compounding as a key factor in his wealth creation. If it works for him, it could work for me too.
What to buy
So, let’s put that into practice. What would I buy today?
Well, I like the look of ITV (LSE: ITV). Its share price has endured a terrible spell recently. In the last 12 months, it lost 26.9% of its value.
However, I sense a bargain. And with its price taking a hit, that’s pushed its yield up nicely. As I write, it offers investors 8.4%. That puts it inside the top 10 highest payers on the FTSE 250.
What also tempts me is its cheap valuation. It trades on just 8.8 times earnings. That’s below the FTSE 250 average of 12.5.
Of course, there are risks. To start, the advertising market has been through plenty of struggles in recent years. Some see the industry as dying out. There’s certainly a case to be made given the firm’s weak advertising revenues in the first half of the year.
However, I’m bullish on the long-term outlook for ITV. It’s invested heavily in its digital streaming platform ITVX. And while that’s made a dent in its bottom line in the short run, I’d expect it to help boost revenues in the years to come.
If I had the spare cash, I’d be tempted to add ITV to my portfolio. It’s undervalued shares with substantial yields like ITV that I’m using to build up my passive income.
