To answer the question of how I can earn a £500 a month passive income by investing in UK stocks, let’s walk through three simple steps.
Setting clear objectives
Before making any investments, it’s crucial that I understand my current financial situation. This includes considering my income, expenses, and existing savings. Such an assessment is useful because it will help determine how much I invest each month.
I’d also carefully evaluate my risk tolerance level. The reason being that this varies from person to person and is influenced by factors like age and individual temperament. In my case, since I’ve got a long way to go before reaching retirement, my appetite for risk is relatively high.
After considering this, it would be wise for me to define my passive income goal. For the purposes of this experiment, that figure comes in at £500 per month, which equates to £6,000 a year.
Selecting the right stocks
Having assessed my finances and defined my overall goal, it would be time to pick some stocks. And since my strategy is to earn passive income in the form of dividend payments, this means seeking out well-established companies with a history of consistent shareholder payouts.
Luckily for me, the FTSE 100 is home to a number of companies that I think fit the bill. For example, take multinational insurance company Aviva with its whopping 7.63% yield.
From here, I would seek to diversify my portfolio by investing in dividend-paying companies in other industries. At the top of my watchlist at the moment are business like National Grid (5.71% yield) and Rio Tinto (8% yield).
However, it’s crucial I acknowledge the risks associated with high-yield stocks. For instance, a yield that appears attractive might be a result of a falling stock price, indicating potential underlying issues within the company.
Furthermore, unexpected economic downturns or industry-specific challenges can also impact dividend payments. This is something I’ll always need to bear in mind.
Playing the long-term game
The good news is that adopting a long-term investment horizon will help me mitigate these risks. By focusing on the long run, I’ll be well-placed to weather the storms caused by short-term fluctuations in the stock market.
On top of this, buying dividend shares and holding them for as long as possible will enable me to harness the power of compounding. That’s even after starting out from scratch.
To illustrate, let’s say I invest £600 each month into a diversified selection of dividend stocks and manage to achieve an average annual yield of 7% (a figure I think is realistic in today’s market). After nine years, I’d have a portfolio worth approximately £88,000.
From here, if I continued to achieve that 7% annual yield, I’d be bringing in around £6,160 a year in dividend income. This translates a passive income worth just over £500 per month. Not too bad at all if you ask me.
