I like owning dividend shares to earn passive income as it lets me benefit from profitable businesses that have already proven their ability to succeed.
If I had a spare £30,000 to invest today with the target of working towards an average monthly passive income of £250, here is how I would go about it.
Taking a strategic approach
I would want to reduce my risk, so would diversify across a range of companies and industries.
With £30,000, I could comfortably invest equally over five to 10 choices.
Given that passive income is my focus, I would be willing to invest in companies that I felt had limited growth prospects. But I would definitely focus on finding firms with a large addressable market, proven business model, and a competitive advantage that gives pricing power.
Hitting the target
A monthly £250 adds up to £3,000 over one year.
To earn that from a £30,000 portfolio, I would need to earn an average dividend yield of 10%. That sounds very high for blue-chip shares. But actually, at the moment a number of blue-chip FTSE 100 shares have yields above 10%, including Vodafone and M&G.
As I’d aim to keep my portfolio diversified, though, I would certainly not put the £30,000 into just a pair of shares. Dividends are never guaranteed.
Some shares offer dividends fairly close to 10%, but I do not need to hit my passive income target immediately. An alternative would be to invest the money now in a portfolio with an average yield of, say, 8%, then compound the dividends until I was earning an average of £250 per month in dividends.
At that point, I could stop using the dividends to buy more shares and simply receive them as passive income.
Keeping things simple
That really is that.
Some passive income ideas are complicated, but owning high-quality dividend shares can be simple.
I would do my research before investing, so I knew what I was buying and felt confident that I was buying into a good companies at attractive prices. I would stick to what I knew and always keep an eye on risk.
Having made my initial choices about strategy and shares to invest, I would then largely sit back and watch the income come in. If something happened to change my investment thesis when it came to a given company, I might consider whether I ought to sell the shares and reinvest the money in something else.
Rather than unnecessarily complicating things, my approach to earning passive income would involve putting money into great companies with proven records of profitability and then letting them work their magic on my behalf.