How I plan to use investing to earn £1,000 a month in passive income

£1,000 per month in passive income can completely change one’s life. But it requires work and careful planning. James Reynolds would aim to get there via dividend investing.

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.

Piggy bank rocketing skywards

Image source: Getty Images

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 think that one of the best ways to build a passive income stream is through investing in dividend stocks. Many companies pay shareholders some of the profit they make in a given year and this payment is called a dividend.

The average dividend yield for the FTSE 100 right now is 4.1%. I believe this is a decent amount to use when determining the UK stock market’s ability to provide passive income through shareholder dividends.

Average yields

The Footsie’s average yield fluctuates as the companies in it adjust their payments to fit their financial situations and as share prices change. Sometimes the yields can go up, but they can also go down. However, several UK firms pay more than the average of the FTSE 100 index. As I write, Rio Tinto, the major mining firm, has a dividend yield of just over 9.8%. National Grid, the utility focusing on electricity, estimates a yield of around 4.6%. Vodafone, the telecommunications company, is paying roughly 5.9%.

These numbers are all higher than the FTSE average. But it’s worth remembering that no company is under obligation to issue a dividend and may be forced to cancel them in extreme circumstances. The covid-19 pandemic forced lots of UK companies to do this in 2020.

Pay attention and diversify

Different industries make money in different ways. Some can be expected to be steady earners all year round. Others, like mining and commodities, can be more cyclical. For companies like these, dividends might come and go. But that doesn’t rule out the possibility of me investing in cyclical stocks. It simply means that I must choose the right moments to invest and keep a close check on my equities while they are held.

Natural resources stocks are attractive to me right now, so I’m interested in companies like Glencore, Anglo American, and BP. However, when it comes to a dividend-driven investment plan, I believe that diversification across sectors is very important. I know that these industries probably won’t be booming so much in the future. So defensive stocks like Imperial Brands, Tate & Lyle, and some others highlighted in this article would also be on my radar.

High-dividend stocks tend to have other valuable qualities as well, which is one of their greatest advantages. And one hypothesis I’m following right now is that in the next bull market, firms with strong value characteristics would likely lead the charge upward.

After all, it’s difficult to dispute that growth stocks with high valuations have recently seen significant losses. And it might indicate that they’ve had their moment in the spotlight for the time being, and possibly for years to come.

£1,000 per month in dividends

To earn £1,000 each month in dividends, I would need a portfolio worth around £300k. At 4.1% I could potentially receive £12,000 in yearly dividend income. Building a portfolio of this size will require careful planning, saving and investing over many years. But it’s not impossible. By starting to invest today, focusing on the long term, and reinvesting the dividends I earn along the way, I could reach that goal much sooner than by simply saving.

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.

James Reynolds 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.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Why the boohoo share price soared by almost 14% in November

Is troubled online fashion retailer boohoo beginning a turnaround that may cause the share price to rocket through 2025 and…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

Here’s how saving £5.40 a day could net me £1,971 yearly passive income for life

The price of a cup of coffee seems to have broken the £5 mark. Is it time to put that…

Read more »

Investing Articles

2 top FTSE 100 stocks surging to record highs (hint — not Rolls-Royce)!

Ben McPoland takes a closer look at a pair of high-performing FTSE 100 stocks that continue to enrich long-term shareholders.

Read more »

Investing Articles

A cheap FTSE 100 share to consider buying for the next 10 years!

This FTSE 100 share has pride of place in my portfolio. Here's why I think it could be a top…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Down 44% in 2 months! Is this FTSE 250 green energy pioneer priced too cheaply?

After a sharp tumble in recent months, this FTSE 250 company with a growing order book is almost 90% below…

Read more »

Investing Articles

Investing a £20k Stocks and Shares ISA in this high-yielder might give me a £2,000 annual income

Harvey Jones is now wondering whether to pour his entire Stocks and Shares ISA allowance into a single FTSE 100…

Read more »

Investing Articles

Saving £20k in an ISA? Here’s how I’m aiming to turn that into a stunning £2,035 monthly passive income

Harvey Jones is keen to build a high and rising passive income by investing in a balanced spread of top…

Read more »

Investing Articles

How I’ll aim to turn an empty ISA into a £100k nest egg buying cheap shares in 2025

Christopher Ruane explains how he thinks taking a long-term approach to buying cheap shares and holding them could help him…

Read more »