5 steps to earning £500 in passive income a month

By following a number of strategic steps, our writer thinks he could set himself on the course to earn hundreds of pounds of passive income each month.

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.

A young Asian woman holding up her index finger

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.

We are all familiar with what is called passive spending – money going out the door without even the slightest effort on our part! But what about the opposite – passive income?

The theory of passive income is that people can earn money without working for it. While that may sound too good to be true, an example of such an approach I use is investing in shares that pay me dividends. Here is how I could start to do that from scratch, targeting £500 of earnings each month — without working for it.

Step one: use money to make money

I could start this plan without any savings. But when I want to buy dividend shares, I will need to have money to invest.

So my first step would be to start setting aside money on a regular basis I could use to invest. I would target a regular set amount, monthly, weekly or even daily. And that target would be one I felt was realistic, given my financial situation, which maybe different for others.

Step two: prepare to buy shares

Next, although I would not yet have enough money to start buying shares, I would get ready to do so when the time is right.

So I would set up a share-dealing account or Stocks and Shares ISA.

Step three: learn how shares work

The third step is the one I think might take the most time. That is learning about how shares work. A lot of people who have never invested reckon they could do so successfully. In some cases they could but, like anything in life, there is a learning curve.

For example, I would want to learn about the difference between a good business and a rewarding investment. A case in point. I think Aston Martin has a good business selling luxury cars. But I would not invest in it hoping for a passive income, because the company’s debt burden means I think it is unlikely to be paying out any time soon.

I would also want to learn about valuation. I like engineer Spirax-Sarco’s record of raising its dividend annually for 54 years. But its share price trading at 36 times earnings is too pricy for my tastes.

The more I can learn about how companies are valued and topics like dividend coverage and free cash flow, the better placed I think I will be to put my plan into action.

Step four: start buying shares

Once I had the funds and knowledge then I would hunt for shares I could buy. I would not rush. Instead, I would be happy to wait for companies I thought had good businesses to become available at an attractive price.

Not all investments work out equally well – I have owned some real stinkers! So I would reduce my risk by diversifying across a range of shares.

Step five: enjoy the passive income!

To get to my monthly target of £500 I would need a portfolio of around £120,000 worth of shares yielding an average of 5%. I could hit the target with less or more, depending on the yield. But I would never buy just for yield.

Instead, I would hunt for the sort of quality companies with great prospects I discussed above.

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.

C Ruane 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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »