Investing money in shares that pay dividends is a proven way to generate passive income streams — sometimes very big ones.
I like it compared to most passive income ideas for a few reasons. As an approach it has been proven to work (though that depends in part on buying the right shares). It helps me benefit from the commercial performance of businesses far bigger than I could build in my spare time. I also find it genuinely passive: I can simply put money into an account, buy shares, and hopefully watch the dividends pile up.
Getting ready to invest with zero savings
What kind of account?
There are lots of options available for share-dealing accounts and Stocks and Shares ISAs. So I would do some research to decide what seemed to suit my needs and financial position best.
As for financial position, I would start even without savings. How? By putting aside a regular amount and building up the amount I had available to invest over time.
Doing the long-term maths
Imagine I had £180 to invest each month. In a year, that would equate to £2,160.
If I invested that at a dividend yield of 7%, I would earn 7% of what I paid in dividends annually (as long as the shares kept their dividends steady) — around £151.
That would be welcome, but far off my target. Still, I think I could hit that target, by doing two things.
First, keep going. This is a long-term passive income plan, not a flash in the pan. So I would keep making regular contributions, month after month and year after year.
Secondly, instead of withdrawing my dividends as passive income at first, I would reinvest them. That would give me more than £180 each month to invest even though I was only putting in £180 of cash per month. This simple but powerful investing technique is known as compounding.
Investing £180 per month at an average yield of 7% and compounding, after 20 years I would be earning around £6,397 in dividends each year. All for £180 per month invested in shares!
Finding shares to buy today
Although the 7% I use in this example is well above the average yield for FTSE 100 firms, I think it is achievable in the current market.
As an example, consider FTSE 100 financial services firm Legal & General (LSE: LGEN). It has a yield of over 9%, well in excess of my target. It also has a solid dividend track record, having increased its dividend annually for all but one of the past 15 years.
Past dividend performance is not a guarantee of what may happen in future, though. The last cut followed a financial crisis. If that happens again and investors withdraw funds, I see a risk of another cut.
But with a large potential market, a sizeable customer base, strong brands, and a proven record as a passive income powerhouse, I am happy to keep holding Legal & General shares and hopefully watch the dividends keep flooding in!
The post Here’s how I’d invest £180 a month to target a passive income of £6,397 appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Want a 10% yield? 2 FTSE shares to consider buying today
2 shares I’d love to buy from the FTSE 100 for passive income!
9% yields! I expect these 2 ultra-high income stocks to fly in the next bull run
It’s down 8%, so would I be silly to ignore the cheap Legal & General share price?
6,195 Legal & General shares could generate £18,561 a year in passive income!
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.
