How I’d invest £500 a month to achieve a passive income

This Fool highlights the stocks he’d buy today with an investment of £500 a month for a passive income portfolio of UK shares.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I firmly believe buying stocks and shares is one of the easiest ways to generate a passive income. 

It’s also one of the most accessible ways to generate passive income, in my opinion. Indeed, anyone can buy stocks and shares with just a few pounds. Other strategies require thousands, or hundreds of thousands, of pounds to generate such an income. 

However, this strategy might not be suitable for all. Dividend income generated on shares is never guaranteed. Dividend income is paid out of profits. Therefore, if a company’s profits suddenly decline, management may have to reduce the payout. 

Still, I’m comfortable with the level of risk involved in buying stocks and shares for a passive income. And I think it could be possible to generate one with an investment of as little as £500 a month. 

This is the strategy I would use. 

Passive income strategy

An investment of £500 a month is not going to enable me to achieve millionaire status fast. Nevertheless, I think it will put me on the right path as this money will almost immediately start generating income. Moreover, by reinvesting it back into the market, I can create a virtuous cycle.

I would invest my £500 a month in a portfolio of blue-chip stocks. I would buy companies that have robust competitive advantages and strong brands. Some examples are Unilever, Diageo and BAE Systems. These stocks offer dividend yields of between 2% and 5%.

I believe that targeting a range of shares with different dividend yields is the right approach. Focusing exclusively on companies with high dividend yields may expose me too much risk. An unusually high yield can signify that the market does not believe the payout is sustainable, although it is not a guarantee. 

Some research shows that companies with lower dividend yields achieve better dividend growth in the long run, although once again, this is not a guarantee. 


As well as the companies outlined above, I would also buy an investment trust for my passive income portfolio. 

The company I would focus on is the City of London Investment Trust. This trust owns a portfolio of income stocks and shares, which is managed by professional investment managers.

Not only does this provide a high level of diversification, but investment trusts have a unique trait, which can make them excellent income investments. They can hold back 25% of their revenue every year. This can then be used in periods when dividend income from the portfolio declines to fill in the gap. This came in particularly handy last year. 

The one downside of using this approach is that I cannot choose the investments in the portfolio. This could expose me to some companies I would rather not own. The trust could also underperform the market. 

Despite these risks and challenges, I think the trust would fit perfectly into my £500 a month passive income portfolio. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares of Diageo and Unilever. The Motley Fool UK has recommended Diageo and Unilever. 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.

More on Investing Articles

British Pennies on a Pound Note
Investing Articles

This former penny share is up 163% in a year. Could it be worth even more?

Christopher Ruane explains some of the concerns that kept him away from a penny share before its stellar rise --…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

I’m not convinced the Dr Martens share price is a bargain. Here’s why

After the bootmaker reported its full year results today, our writer explains why a Dr Martens share price in pennies…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Should I invest in the S&P 500 or FTSE 100?

Ben McPoland thinks one FTSE 100 stock might offer a compromise between high US market growth and cheap Footsie valuations.

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

How much passive income could I earn by investing £100 a month in UK shares?

With just a £100 monthly investment in UK dividend shares, I could achieve a decent passive income stream of over…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

Looking for cheap growth shares? Here’s a FTSE 250 stock to consider in June

Pets at Home shares still look dirt cheap, says Royston Wild. Here, he explains why the retailer might be one…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

The 3 big risks to Lloyds’ share price in 2024!

Is the Lloyds share price one of the FTSE 100's worst investor traps? Royston Wild thinks the bank's shares could…

Read more »

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »