My 4 steps to making £350 a month in passive income

Jon Smith explains the steps he’s taking to try and meet his passive income target via dividend stocks.

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Passive income is a hugely desirable target for virtually any investor, me included. The concept of being able to park my money in a stock that pays me a regular dividend is a fairly simple one. And the benefits and rewards of doing so are just as relevant today as they were decades ago. Even though it sounds simple in theory, I need to make sure I follow a few key steps to give myself the best chance of meeting and maintaining my goal of £350 a month.

A lump sum or regular chunks?

The first step I need to take is to decide whether I want to invest a lump sum or invest on a regular basis. A large part of this will come down to how much cash I have ready to go right now. For example, if I want to make £350 a month in passive income and am targeting a 6% dividend yield, I’ll need to invest £70,000.

I don’t have this kind of money lying around, so I’ll be investing smaller chunks on a regular basis to build up to my target level of passive income. What this involves is setting aside a chunk of cash each month. If I put £500 a month in dividend shares with the same target yield, I’ll reach my goal in nine years.

This first step is key because it sets my expectations at a realistic level. Of course, it’s not set in stone, if I receive unexpected lumps of cash in years to come I can always speed up the process.

Picking the right stocks for passive income

The second step is to work out the stocks I want to invest in. This also ties in with my third step of figuring out what I want my average dividend yield to be. The perfect middle ground is to find dividend shares that have a solid track record of paying out income to investors. At the same time, if I can find a company like this that also offers me a high dividend yield, it ticks both boxes.

Usually, I have to compromise slightly on the yield in order to find a stable company. Earlier this year, the dividend yields of Polymetal International and Evraz were the highest in the FTSE 100 index by a long way. Yet these had to be cut due to problems with the situation in Russia. So these yields weren’t sustainable.

In terms of current dividend stocks that I’d buy, I like British American Tobacco, Taylor Wimpey and M&G. All three of these currently have a yield in excess of my 6% target.

Ongoing maintenance

The final step is to ensure that I keep investing over time to stick to my timeline. Investing each month means that I need to be active. So although the income received is passive, the whole process isn’t! In the years to come I might also have to rebalance my portfolio. If a stock cuts a dividend, I might need to sell it and put the cash in a rising stock. I know that my 6% isn’t guaranteed, of course. But overall, I think it’s worth the effort to be able to enjoy the benefits further down the line.

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.

Jon Smith has no positon in any share mentioned. The Motley Fool UK has recommended British American Tobacco. 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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