2 steps to earning £250 in monthly passive income

This is the approach our writer would take to invest in dividend shares as a way to try and boost his passive income streams.

pensive bearded business man sitting on chair looking out of the window

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Does the idea of earning more money without having to work harder for it sound good? A lot of people fantasise about such passive income – while others make the dream a reality.

Here is how I would aim to earn £250 a month this way.

Step one: allocate money to invest

My plan involves buying dividend shares. Those are shares that pay me a regular income for owning them. That payment is known as a dividend. It typically is not big – just pennies, or even fractions of a penny per share. It is also never guaranteed. What’s more, the company can stop paying dividends if it wants.

By accumulating lots of those shares, I reckon the individual dividends could add up. I would invest in a range of different companies operating in various parts of the economy. That is a risk-management principle known as diversification. Basically, that means not putting all my eggs in one basket. If a particular company stops paying dividends, owning a range of shares should hopefully mean I still earn some passive income overall.

To buy these shares I could either allocate a lump sum upfront, or save a little money regularly. The second approach would let me fit the plan to my own financial situation. I could start buying shares as I was saving, building up to my monthly passive income target over time.

Step two: invest in shares

I would hold the money in a share-dealing account, or Stocks and Shares ISA. Once I had some money I could move to action and start buying shares. So how would I find them?

Basically, a dividend is a tiny sliver of a company’s profits. Although a firm can make a loss one year and still pay a dividend. However, over the long term, it will need to be profitable to pay dividends regularly. So I would look for businesses I thought had a good chance of being profitable in years to come.

That would involve identifying a customer market I expect to stay strong, such as food or medicines. Then I would identify businesses in that area that had some competitive advantage. It could be patents like AstraZeneca or unique brands like Marmite owner Unilever.

I would have a look at the balance sheet too. If a company has a lot of debt then profits might have to go towards paying that off rather than rewarding shareholders with dividends. If I liked what I saw and I thought the company traded at an attractive price, I might add it to my portfolio.

Passive income target

How much passive income I earned would depend on how much I invested and the average dividend yield of the shares I bought. For example, if the shares yielded 5%, I would need to invest £60,000 to try and generate £250 in dividends each month.

If I did not have £60,000, I could start by saving what I was able to afford each week or month and build up to my passive income target over time. But the first thing I need to do, whatever approach I take, is to stop just planning and start actually doing!

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 considered so you should consider taking independent financial advice.

Christopher Ruane owns shares in Unilever. The Motley Fool UK has recommended 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.

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