The idea of earning money year after year from a one-off lump sum investment appeals to me. One way I aim to generate such recurrent income is by investing in blue-chip dividend shares.
If I wanted to target £1,000 annually in such ongoing passive income, here are three steps I would take.
1. Setting up a way to buy shares
In some ways, the first step might sound like the easiest one, namely setting up a method I could use to make purchases in the stock market.
Specifically, I would open a share-dealing account or Stocks and Shares ISA to do this.
Over time, charges can certainly add up that could eat into my recurrent income. So although this step may sound easy, I would take time to compare the options and decide which one was best for my personal financial circumstances.
2. Finding shares to buy
Next, I would make a list of shares I want to buy. Billionaire investor Warren Buffett always emphasises the value of staying inside a circle of competence when investing.
I would do that by focusing on businesses I felt I understood and could assess. I would also be asking myself a couple of questions about shares.
First, is this a business I think has the makings of a long-term money machine I would be happy owning a stake in?
To answer that, I would look for a business I reckoned had some unique competitive advantage in a market I expect to see large customer demand. For example, Unilever and Apple would match that description for me.
This is not just about finance though – it can also involve personal choices. For example, I am happy owning shares in British American Tobacco but others may prefer not to invest in tobacco companies.
The second question I would ask here is whether I think the current valuation offers me value. Partly, that involves looking at a share price, but it can also involve considerations like how much debt a business is carrying on its balance sheet.
Note that, although recurrent income is my goal, so far I have not even mentioned dividends. These are never guaranteed. While I hope to earn recurrent income, whether that happens in reality will depend on what shares I own.
So buying a share just because it currently offers a high dividend yield can turn out to be a classic example of a value trap, in some cases. High yields could help me hit my goal — but I never invest just on the basis of yield.
3. Building passive income streams
That said, yield would determine what my recurrent income might be. Investing £11,230 at an average yield of 8.9% ought to let me hit my £1,000 annual target for ongoing passive income from year one.
If my average yield is lower, I could choose to reinvest dividends (known as compounding) until I hit my goal.
Right now though, quite a few FTSE 100 shares I own yield 8.9% or higher, including names such as Vodafone and indeed British American Tobacco.
But both face challenges, such as high competition and lots of regulation that can eat into profits. So when designing my portfolio to target a four-figure yearly recurrent income, I would be sure to diversify across a range of shares.
