My plan for achieving £300 a month in passive income

Here are four stocks I’d use right now to try to generate passive income and build up my portfolio to aim for an income of £300 a month.

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My plan for achieving £300 a month in passive income involves building a portfolio using dividend-paying shares.

There’s been a lot of weakness in stock prices over the past few months. And the problems have been made worst by the escalation of trouble in Eastern Europe.

Meanwhile, my stocks portfolio includes investments in several low-cost index tracker funds. For example, I’ve got trackers following America’s broad S&P 500 index and small-cap stocks in the US. And in the UK market, my trackers follow big-cap, mid-cap and small-cap stocks. And for spice, I’ve even got trackers following emerging markets around the world.

Dividends remain robust

And through the weak markets of the past few months, most of my tracker investments have fallen in value. However, one stands out for its robust performance. And that’s the tracker following the fortunes of London’s lead index, the FTSE 100.

I think of the Footsie as a high-yielding index because dividends feature strongly in my returns from the tracker investment. Right now, for example, the combined yield of all the stocks in the index averages out at just under 4%. And because I’m in the building stage of my investment career, my tracker is the type that automatically reinvests the income for me.

And I think the Footsie’s leaning towards dividends is what’s helping it remain strong now. High-yielding stocks often come from cyclical sectors, such as finance, housebuilders, commodities and others. And commodity prices have been surging, driving up the big oil and resources stocks, many of which feature strongly in the index.

Meanwhile, taking the roughly 4% yield of the FTSE 100 as a starting point, I can estimate how large my portfolio needs to be to deliver £300 a month in passive income. My calculations tell me a portfolio of £90,000 could deliver an income of £300 a month. That’s if the lump sum can earn 4% dividend income each year. And one way of achieving that could be to invest it in the income version of a FTSE 100 tracker.

High-yielding, defensive stocks

But that’s not the only way. I could also invest directly in dividend-paying shares. For example, in today’s market, I’d aim to invest in companies such as renewable energy specialist SSE, healthcare company GlaxoSmithKline, smoking products maker British American Tobacco and electricity-focused transmission company National Grid.

Those firms tend to have less cyclicality in their operations than some of the other big-dividend-paying stocks. So I see them as potentially enduring long-term investments. And that makes them suitable for the building stage of my portfolio as well. And I’d make regular monthly investments into such stocks. Then, along the way, I’d reinvest all the dividend income with the aim of compounding my way to the £90,000 target value.

Of course, there are no guarantees of a positive investment outcome. Businesses can run into operational difficulties and I could even lose money on shares rather than compounding my wealth. Nevertheless, the long-term record of the overall stock market is encouraging. And I’d take on the risks involved in owning shares in order to stand to benefit from the potential for gains over time.

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.

Kevin Godbold owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco and GlaxoSmithKline. 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.

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