Having a lot of cash to invest isn’t the most crucial thing when it comes to passive income. Being able to invest regularly over a long period of time is a much bigger advantage.

The average price of a pint of beer in London is £6.75. Given enough time, investors looking for extra income could generate a significant return with less than half that amount each day.

What can you achieve with a £3 habit?

Over 30 years, investing £91 a month – the equivalent of £3 a day – can generate significant passive income. And reinvesting the profits can give it a large boost.

Exactly how much depends on the average return over that time. At an average annual rate of 5%, £3 a day is £3,524 after 30 years.

At 7%, the returns are much higher. Investing £91 a month at that rate generates £6,971 a year – or £580 a month – in passive income.

That’s the same as I’d get if I invested £14,000 today at 7% and reinvested the returns for 30 years. So over three decades, £3 a day could be worth £14,000 today.

Dividend shares

I think the best place to look for passive income opportunities is dividend stocks. These are shares in companies that distribute some – or all – of their profits to shareholders.

Not all dividend stocks are the same, however. In essence, investors typically face a trade-off between higher yields and better growth prospects.

Shares in Imperial Brandsfor example, they have a 7.25% dividend. That’s quite a lot, but investors need to consider the risk of falling tobacco sales in the future.

In contrast, a consumer goods company Unilever has a much more stable outlook. But the dividend yield is much lower, around 3.5%.

Actions worth considering

At the moment I think that Tesco (LSE:TSCO) could be a good stock to consider. It currently has a dividend yield of around 4% and I think it looks like an attractive opportunity.

The threat of competition – particularly from Lidl and Aldi – is a risk. However, its size and scale make Tesco arduous to replace, and this is reflected in its ability to sell products.

The best retailers sell inventory quickly, buy more, and repeat. Imagine that the number of times a company turns over inventory each year is called… the inventory turnover ratio.

Tesco’s index is 24. The higher the better, which is definitely better than its closest competitor Sainsbury (15) and the like CostWhat (13) and Marks & Spencer (11).

Growth prospects

A company like Tesco, with a forceful position in an crucial industry, should be able to grow its dividend over time. And it has done quite well over the past decade.

Tesco dividends per share 2015-24

Created in TradingView

As a result, I would expect to achieve a return of better than 4% on average over 30 years by buying Tesco shares. For this reason, I think it could be a great choice for someone starting to build a passive income portfolio.

If all goes well, I don’t think an average annual return of 7% over the long term is impossible. And that could turn the equivalent of £3 a day into something significant.