Passive income is money one gets without working for it. It’s easy to see why that could come in handy, from paying an unexpected bill to splurging on a holiday. The harder part can be making it happen.
One of my favourite passive income ideas is investing in UK stocks. Here is how I would aim to get £500 a month of passive income by investing in UK dividend stocks.
Working backwards to passive income target
The passive income would be in the form of dividends paid by companies. So I would start by calculating backwards, from my monthly passive income target of £500 to the cost of the shares. £500 a month is £6,000 a year. A ‘yield‘ is the dividend paid out on a share as a percentage of its price. So, if I invested in shares with a 10% yield, I’d need £60,000 of shares to generate my target passive income.
But it’s unusual for a share to yield 10%. Often, such a high yield is a warning that the share could be a ‘value trap‘, and analysts expect it to cut its dividend. However, there are quite a few top UK stocks that yield 5%, 6%, or even higher. If I targeted an average 6% yield, I would need £100,000 to invest in the UK shares I choose.
Drip feeding investment
That’s quite a lot! If I had £100,000 lying around ready to invest, maybe I wouldn’t be thinking up passive income ideas in the first place.
The good news is that I could start with however much I had. While I aim to invest £100,000 in shares with an average yield of 6%, I don’t need to invest it all at once. I can drip feed it over time.
In fact, that’s one reason that UK dividend shares are among my favourite passive income ideas. A lot of passive income streams require a large capital investment upfront, such as when buying a property or business. By contrast, I can start investing in UK dividend shares with whatever I have.
The longer it takes me to reach my £100,000 target, the slower it will be for my monthly passive income to hit £500. But over time, regular saving will bring me closer to the target. Plus, I will earn income from any shares I have if the company in question pays a dividend. So, for example, when I have saved £10,000 and put it into UK dividend shares, I would prospectively expect £600 a year in income. That’s £50 a month. That’s still a long way off my target of £500 each month, but it’s a start.
Choosing UK dividend stocks as passive income ideas
Not all companies pay dividends. Among companies which do pay dividends, they are never guaranteed. Last year, for example, Shell cut its dividend for the first time since the Second World War.
I would try to reduce my risk by diversifying across different shares. I would stick to UK dividend stocks with a solid dividend history and strong business prospects. Then I would simply start my regular saving, invest it in UK dividend stocks, sit back, and watch my passive income streams mount.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Christopher Ruane has no position in any of the shares mentioned. 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.