From setting up an online shop to buying a rental property, the world is full of passive income ideas that to me look anything but passive.
By contrast, putting money into the shares of proven blue-chip businesses, then sitting back and letting them pay me regular dividends, is the sort of passive income idea I can really get excited about. Indeed, like millions of people, I am already earning money that way without working for it.
If I wanted to target £300 a month on average doing that, here is how I would go about it.
Finding shares to buy
My starting point would be finding the sorts of firms I reckoned may pay beefy dividends far into the future.
Some people try to do that by looking at current yields. Diversified Energy, for example, currently has a dividend yield of 15.4%. That means for every £100 I invested in Diversified shares today, I would hopefully earn over £15 annually in dividends.
I say ‘hopefully’ because dividends are not guaranteed at Diversified – or any other company. That is why, rather than focusing on yield, I look at the fundamentals of a business.
Is there going to be a large market of potential customers for its products or services? Does it have some edge over rivals that means it will not need to compete on price alone? Will the company be able to distribute excess cash to shareholders as dividends, or will it need to be spent on other priorities such as paying down debt?
Building a portfolio
Such an approach may whittle down my options considerably. That is fine by me. I want to focus on high-quality companies that meet my investment criteria for passive income potential, including when it comes to their valuation.
If I cannot find such shares today, I will wait. Such is the patience of the long-term investor.
I want to build a portfolio of such shares, rather than put all my eggs in one basket. To do so, I would set up a share-dealing account, or Stocks and Shares ISA.
Setting a target
How much would I need to invest to hit my target of £300 a month?
That depends on the average yield of my portfolio. £300 per month is £3,600 a year. At a 10% yield, I could earn that with a £36,000 investment. A 5% yield would require me to invest £72,000.
With my focus on quality and value, I would not choose shares just because of their yield. That might mean that to hit my target, I need to invest more money than I have available today.
In that case, I would aim to build my portfolio over time. I could hopefully start earning at least some passive income in a matter of months, even if it took me much longer finally to hit my monthly target of £300.
