The idea of earning money without working could offer me more financial flexibility while not eating into my time.
My own approach to earning passive income is to spend spare money building up a portfolio of blue-chip shares that can pay me dividends in future.
If I am serious about this plan and take a long-term approach, I think I could generate substantial income streams in this way. As an example, here is how I would go about targeting £23,000 per year. That would mean receiving close to £2,000 each month on average in dividends.
Building a portfolio
To earn such dividends, I would need to own shares. So I would start putting money aside regularly in a share-dealing account, or Stocks and Shares ISA I could use to buy such shares.
I would use that money to purchase shares I think can pay big dividends in future, relative to the price I pay for them now.
Whether or not a firm has paid out in the past is no guarantee of what will happen next.
So to build my passive income streams, I would hunt for well-established companies with a proven business model I think will generate a lot of excess cash in future they can use to fund dividends.
Examples from my own passive income portfolio at the moment include DCC, ITV and M&G.
But even the best-run company can encounter unexpected difficulties. So I would spread my choices by building a diversified portfolio of shares.
Aiming for a target
How much dividend income I can expect to earn depends on two things. The amount of money I invest and what the average dividend yield of my portfolio is.
The more I invest, the more I can earn. The higher the average yield, the more I can earn.
One of those factors is under my control – the amount I invest.
The average yield is a bit different as it is not under my control. After all, dividends are never guaranteed and investing in shares that yield 8% today does not mean that I will keep earning 8% from them in future.
A firm might raise its dividend when business goes well. Then again, it could also slash the payout.
So rather than trying to hit my target by chasing yield, I always focus on buying into great companies at attractive prices.
Setting investment levels
Imagine I earn an average 5% yield. To hit my annual passive income target of £23,000, I would need to invest £460,000. That is a lot of money!
Fortunately, I can also build up to my target over the course of years through making a regular contribution to my investment funds based on my own financial circumstances.
That would hopefully let me earn a growing passive income over the years as I inch towards my target. That might take years or decades, depending on how much I invest.
Putting aside £1,000 a month, for example, I would hit my target in 39 years. Investing is a long-term activity — but could help me earn a lifelong income without working for it.
