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!