£10k of savings? Here’s how I’d aim to turn that into passive income of £500 a month

With £10,000 available to invest, here’s how I’d work to turn that into a steady passive income stream through investing in stocks.

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If I had £10,000 available to invest today, I’d focus entirely on generating passive income through the stock market. Specifically, my goal would be to earn £500 per month in dividends. This equates to a 6% dividend yield. So, here are the three methods I’d use.

Build a diverse portfolio of dividend stocks

To begin with, the foundation of my strategy would be to assemble a portfolio of around 20 reliable dividend-paying stocks. But perhaps more importantly, I’d invest across multiple sectors. This is to diversify my risk and avoid my income stream getting disrupted by cyclicality. Thus, I’d be aiming to invest in a variety of industries that include consumer staples, pharmaceuticals, consumer discretionary, property, and financials.

Some great UK dividend stocks I like include Tesco, GSK, British American Tobacco, Taylor Wimpey, and Lloyds. These companies have stable and relatively reliable payouts that grow every year, thereby ensuring a steady stream of passive income.

As such, with £8,000 of my cash invested across these big dividend stocks and an average dividend yield of approximately 5%, I could realistically expect £350-£450 per month in dividends. What’s more, I can use a stocks and shares ISA to eliminate taxes on the dividends I get.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Invest in dividend ETFs and funds

Aside from dividend stocks, exchange-traded funds (ETFs) are also a great option. Some of these track an index of dividend-paying companies. This is also a smart way to diversify my passive income stream. I’d invest around £2,000 in ETFs like the iShares UK Dividend UCITS ETF. This fund has a dividend yield of about 9.5%.

Its dividends would add another £150-£200 per year. The benefit of dividend ETFs is instant diversification across many stocks and sectors. For instance, the iShares UK Dividend UCITS ETF’s top 10 holdings include Rio Tinto, HSBC, British American Tobacco, Imperial Brands, Vodafone, L&G, National Grid, Schroders, Anglo American, and GSK. On that basis, I can be expect that dividends are pretty secure due to the broad spread of stocks in the portfolio.

Reinvest dividends for passive income

If I wanted to reach my £500 monthly income target through quicker means, I’d have to be very disciplined in doing two things.

The first is that I’d need to reinvest all the dividends from individual stocks and ETFs to compound growth. For example, I could buy more shares of Taylor Wimpey with its massive dividend yields.

The second is that I’ll need to really focus on drip-feeding a monthly amount of my savings into the stock market. For instance, investing £1,000 a month could get me to £500 of monthly passive income in as soon as eight years.

Of course, I know that dividends aren’t guaranteed and I could even lose money.

But assuming I don’t, with smart dividend stock picking, strategic ETF investments, and dividend reinvesting, I think I could hit my passive income goal of £500 per month from a £10,000 investment capital in just a few years.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. John Choong has positions in Lloyds Banking Group Plc and Taylor Wimpey Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., GSK, HSBC Holdings, Imperial Brands Plc, Lloyds Banking Group Plc, Schroders Plc, Tesco Plc, and Vodafone Group Public. 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.

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