Each month, cash dividends drop into my share account. This is how I generate passive income – and it’s just as good as it sounds. I do nothing. But the money keeps arriving.
Owning dividend shares isn’t the only way to earn a passive income, of course. But many of the other methods sound like a lot of hard work to me, especially buy-to-let property.
What’s more, by keeping my investments in a Stocks and Shares ISA, I can also invest up to £20k each year without having to pay any tax on my returns.
Of course, buying shares isn’t without risk. To make sensible decisions, I need some knowledge of the stock market and investing.
But by restricting myself to large, dividend-paying FTSE 100 shares, I can make the learning curve more manageable. And now I’ve got some investing experience under my belt, I’m able to make decisions more quickly and easily than when I started out.
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A 10% dividend yield
I wouldn’t invest all of my cash into one dividend stock. That would be too risky, as dividends are never guaranteed and share prices may fall. If anything went wrong, I could lose all of my income and a chunk of my original capital.
To diversify my risk I’d aim for perhaps 12-15 dividend shares, buying gradually over time. One stock I’m considering today is FTSE 100 savings and investment group M&G (LSE: MNG).
This well-known firm has a long history in the UK and offers one of the most generous dividends out there, with a current yield of 10%.
Right now, much of M&G’s dividend’s funded by the older part of the business, which handles certain investment products that are no longer sold. These generate a lot of cash and provide good support for the dividend, at the moment.
Even so, cash from older products will eventually need to be replaced by profits from new sales. The main risk for me is that CEO Andrea Rossi’s efforts to boost new business growth won’t succeed.
I can’t be sure how things will turn out. But M&G’s recent results have been in line with company guidance and suggest to me that Rossi’s plans are on track. I’d be quite comfortable buying M&G shares.
Building a regular income
If I was able to gather £14,000 today for a new investment in M&G shares, I reckon that, with patience, I’d have a good chance of turning this into a £1,000+ monthly income.
Here’s how this might work. Initially – while I’m still working – I’d reinvest all of my dividends and use them to buy more shares. If I assume that M&G’s share price and dividend stayed flat for the duration of my investment, reinvesting dividends could leave me with a holding worth £151,685 in 25 years.
All else being equal, this would give me an annual dividend of £15,168, or a monthly passive income of £1,264.
Building a passive income like this takes time. But it doesn’t necessarily require much work, leaving me free to focus on other things.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. 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.
