Passive income ideas come in many shapes and sizes. One I like – and indeed use myself – is as simple as buying shares in blue-chip companies then collecting the dividends.
That can be fairly lucrative. It also means that, rather than try and start some low-effort business from scratch myself, I can benefit from the hard work and competitive advantages of already successful FTSE 100 businesses.
As an example, here is how an investor willing to adopt a long-term approach could target close to £1,000 of passive income each month by investing £20,000 in the stock market.
Getting ready to invest
A first move would be preparing the groundwork to start buying shares, even if those shares are yet to be decided upon.
There is a wide variety of different share-dealing accounts and Stocks and Shares ISAs available. Before putting £20k into one, I think it makes sense for an investor to decide what might seem best for their own financial circumstances and investment objectives.
How to build long-term dividend income streams
At face value, the goal I am discussing here may seem impractical. £980 a month is £11,760 a year. For an investment of £20k, that would represent a dividend yield of close to 59%.
Even if there was a FTSE 100 share that yielded 59% (and there are none anywhere near), that alone would be a massive red flag for me. On top of that, I would never put all my eggs in one basket so would diversify across a number of shares.
But remember that I said I was discussing a long-term approach here. Long term can be an investor’s friend. Not only does it mean that a great company bought at an attractive price can hopefully prove its worth, it also allows time for dividends to be reinvested – and, in turn, hopefully earn more dividends themselves.
That simple but powerful approach, known as compounding, can be a major force magnifier for the savvy investor.
If an investor put £20k into a portfolio of shares yielding an average 9%, then after 22 years of compounding that portfolio ought to be throwing off passive income of more than £980 a month, on average.
Finding shares to buy
In fairness, 9% is hardly an average yield for a FTSE 100 share. That currently sits at 3.6%.
But that does not mean 9% is unachievable. As an example, consider one share in my portfolio: Legal & General (LSE:LGEN). The FTSE 100 financial services provider currently offers a dividend yield of 9.3%. Management has also set out plans to grow the dividend per share annually.
It has done that since a cut in the wake of the financial crisis, bar one year during the pandemic when the payout per share was held flat.
Thanks to a large target market, strong brand, sizeable customer base and proven capability to generate excess cash flows that can fund a dividend, I feel confident that Legal & General could keep growing its payout in years to come.
Will it happen? The business has reported weaker profits in the past couple of years and one risk I see is stock market turbulence leading policyholders to pull out funds, hurting profits.
However, I plan to hold the share and hopefully keep earning passive income from it.
The post £20k of savings? Here’s how an investor could target £980 of passive income each month appeared first on The Motley Fool UK.
Should you buy Legal & General shares today?
Before you decide, please take a moment to review this first.
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Claim your free copy now
More reading
No savings at 40? How £10 a day could grow into £8,273 of passive income a year!
Here’s how investors could consider trying to turn £11,000 of Legal & General shares into £13,998 a year of dividend income
How much would I need in an ISA to earn a £2,000 monthly passive income?
Here’s how I’m targeting a near-£46k retirement income with dividend shares!
9%+ yields! 3 FTSE 100 shares to consider for 2025
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.
