£9,000 in savings? Here’s how I’d try to generate over £100 a month of passive income

Earning passive income can be as simple as buying shares in proven blue-chip businesses that pay dividends.

Doing that I could hopefully build lifelong and growing income streams, for a single investment now.

If I had a spare £9,000 to invest, here is what I would do to try and target more than £100 in passive income each month, on average.

Getting ready to invest

My first move would be a practical one.

I would set up a share-dealing account or Stocks and Shares ISA then put my £9,000 in it. I would then be ready to start investing as soon as I found some attractive income shares I wanted to own.

Picking an approach

If I did not know about the stock market, I would spend some time learning about important concepts such as valuation.

The next move would be to decide what approach I wanted to take.

As passive income is my objective, I would not need to decide whether to focus on growth or income shares.  But I would still need to make choices like what sectors to focus on (I would stick to areas I knew and understood), how many different companies to buy to keep my portfolio diversified and whether I was willing to invest in low-yield companies with the prospect of high rates of dividend growth.

Quality over yield

The amount of dividends I would likely earn relative to how much I invest (what is known as dividend yield) would in fact not be my priority.

After all, dividends are never guaranteed. So what is a high-yield company today could axe its dividend tomorrow, for example because of changing business circumstances or having a lot of debt.

So my focus would be on finding attractively valued companies with great business models I reckoned could hopefully generate sizeable amounts of excess cash in future that may fund dividends.

Finding shares to buy

As an example, consider one share I recently added to my own portfolio, primarily for its passive income generation potential: Legal & General (LSE: LGEN).

The financial services provider operates in an industry I expect to see substantial, resilient long-term demand. Yes, there will likely be ups and downs along the way. But retirement planning is huge business and likely to remain so.

Specifically, Legal & General’s strong brand, long history and deep customer base all help give it a competitive advantage that has meant it has been consistently profitable in recent years.

A financial downturn could lead to some clients withdrawing funds, hurting profitability. But as a long-term investor I am happy to own the shares.

Reinvesting now to earn more later

With a dividend yield of 8.9%, Legal & General is a passive income goldmine for some investors.

Still, if I invested £9,000 at a more modest (though still high) average yield of 7%, that would earn me £630 in dividends annually. Good, but well below my target.

So I would reinvest my dividends for a decade. That move – known as compounding — ought to mean that, after a decade of compounding at 7% annually, I would be earning average passive income of around £103 each month.

The post £9,000 in savings? Here’s how I’d try to generate over £100 a month of passive income appeared first on The Motley Fool UK.

More reading

2 ‘super-dependable’ dividend shares that have paid income for decades

Very big dividend yields are expected from these FTSE 100 stocks

5 FTSE shares I own for passive income in my SIPP

3 top FTSE 100 value shares I’d buy before August!

Here’s how investing £83 a week in FTSE 100 shares could make me rich

C Ruane has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.