The idea of earning money without working for it appeals to lots of people, including me. But such passive income might not always be as easy to make as it first seems.
I do not bother with time-consuming passive income ideas like dropshipping or setting up a digital shop. Instead, I invest in blue-chip companies I hope can pay me dividends.
That has several advantages as I see it. I can benefit from the proven success of existing business models. The approach does not require me to work. I could start without needing large savings.
Here is how I would target a monthly dividend income of £300.
1. Start saving regularly
I would put aside money on a regular basis to try and get into a disciplined saving habit. That way, over time hopefully I could keep building up my investment pot even when other spending priorities came along.
To do that I would set up a share-dealing account or Stocks and Shares ISA.
How much would I need to invest? Read on to find out!
2. Find shares to buy
The next move, as my regular savings mounted up, would be deciding what to do with them.
I would be looking for shares I thought could pay big dividends not only now in the future. So I would not simply snap a share like Diversified Energy with its 14%+ yield without first understanding more about the business and its long-term outlook.
Each time when assessing possible purchases, I would look for the same qualities.
Does a business operate in a business area I expect to benefit from strong customer demand in future? Does it have some competitive advantage that can give it pricing power, like the unique brands of AG Barr, or the patented technology of AstraZeneca?
Does it have a healthy balance sheet, or could debt eat badly into its ability to pay profits out as dividends? Is the business already paying dividends, or like Google parent Alphabet does it prefer to keep profits to reinvest in growth rather than rewarding shareholders with passive income?
If I found the sorts of companies I thought could pay me big dividends in future and their shares sold for an attractive price, I would buy them. By building a diversified portfolio of different companies, I would reduce the risk to my passive income potential if any one of my choices turned out to be disappointing.
3. Start earning passive income
How much I might earn would depend on the amount I invested and the average dividend yield I received.
At an average yield of 5%, for example, to hit my monthly passive income target of £300, I would need to invest £72,000. I could do that from scratch by investing £900 each month. That way, by the start of 2030, I ought to hit my target dividend income.
I could follow the same approach with smaller regular savings, although it would then take me longer to hit my target. But I ought to start earning dividends along the way which, hopefully, would grow as my investment portfolio expanded in size.
