A common way to generate passive income is earning dividends from shares in blue-chip companies. Doing that means I can benefit from the hard work and commercial acumen of well-established firms with proven business models.
If I had £8,900 in spare cash or savings today, here is how I would use it to generate a passive income.
Understanding the plan
The approach here is simple, in my view. My target is passive income. So I would buy shares I thought would likely pay large dividends in coming years. My focus would not be on share price growth, although when investing I would still take care valuing companies so hopefully I do not overpay.
I would invest in a few different companies to spread my risk. A target of £8,900 is ample for that. My first move would be setting up a share-dealing account or Stocks and Shares ISA and putting my money into it.
Finding shares to buy
When it came to choosing income shares for my portfolio, I would stick to industries I understood and felt I could understand.
An example of a share I would happily buy at the moment if I had spare cash to invest is Hollywood Bowl (LSE: BOWL). The market for leisure activities is sizeable and I expect that to remain the case over time.
As a leading operator of bowling alleys, Hollywood Bowl has a competitive edge in that market, from prime locations to economies of scale. It also operates mini-golf centres.
That has been a recipe for success, with the first half seeing post-tax profit of £22m on revenue of £119m. That is an impressive net profit margin in my view… 18! That profit helps fund dividends and, at the moment, the dividend yield is 3.7%.
The interim dividend grew 22% compared to last year. During the pandemic though, the dividend was cancelled. That highlights an ongoing risk I see for Hollywood Bowl, that any sudden slowdown in the entertainment sector could eat badly into profits. As a long-term investor though, I like the business and would be happy to own a piece of it.
Building income streams
The Hollywood Bowl yield of 3.7% is above the 3.3% average for the FTSE 250 index of which the company forms part.
Still, I believe I could hit a markedly higher yield – say 7% — while sticking to blue-chip FTSE 100 and FTSE 250 firms that meet the criteria I illustrated in my view of Hollywood Bowl.
If I invested £8,900 at an average yield of 7%, I should earn £623 of passive income a year.
As we are already over halfway through 2024, I would not expect that much this year. But I ought to earn it next year — and every year afterwards while I hold the shares, if the companies I invest in maintain their dividends.
If they cut them, I could earn less – but hopefully choosing the right businesses could actually mean I benefit from growing passive income streams over time.
The post Under £9,000 in savings? Here’s how I’d target £623 in annual passive income from next year! appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Hollywood Bowl Group 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.
