One way to earn passive income is simply to put some money into carefully-chosen blue-chip shares then sit back and wait for them to pay dividends.
I say carefully-chosen because not all shares pay dividends and those that do can change their policy at any time. But with a bit of research, I think it is possible to set up passive income streams that could hopefully go on for years, or even decades.
I could begin with whatever spare financial resource I had. For example, if I had £3,000 I was willing to invest, here is how I would aim to turn it into weekly passive income of £30 over the long term.
1. Getting prepared
My first step would be to get ready to invest. At a practical level that would mean setting up a share-dealing account, or Stocks and Shares ISA so I had a vehicle through which to buy shares.
I would also educate myself on some of the basics of how the stock market works.
For example, how could I try to separate companies with outstanding dividend prospects from the rest? How could I value companies? What sorts of red flags ought I to look for when considering the risks of any given investment?
2. Finding shares to buy
My next step would be to draw up a shortlist of shares to buy.
Even the best business can run into unforeseen difficulties, so I would diversify my holdings across a few different shares. With £3,000, I could buy a handful of different shares comfortably.
With dividends as my focus, I would look for a company I thought had strong future cash generation potential. But I would also consider how likely they seem to pay dividends.
For example, Google parent Alphabet generates huge cash flows – but it does not pay a dividend. Investing in Alphabet might be a smart move for me as an investor but, for now at least, I would not do so if my objective was passive income.
Free cash flows start with operating cash flows. That is the excess money generated by a business’s core activities. But other factors, such as financing and investment cash flows, can have a significant impact too.
A business might be bringing in loads of money but need to use it to pay down debt rather than pay dividends. So I also look at a company’s balance sheet for important information like its net debt position.
3. Aiming for an income target
How realistic is it for me to aim for a weekly passive income of £30 on average from an investment of £3,000?
In a year, that would mean earning £1,560 in dividends. That is 52% of my £3,000 investment. That suggests what is known as a 52% dividend yield.
It is almost unimaginable that a high-quality share would have a 52% dividend yield in anything other than exceptional circumstances.
But if I reinvest the dividends as I go, I could hopefully hit my passive income target over the long term. At an 8% annual return, for example, after 24 years, my initial £3,000 investment ought to be generating £30 on average in weekly dividends.
The post £3,000 in savings? 3 steps to try and turn it into £30 of passive income a week appeared first on The Motley Fool UK.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet. 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.
