£20,000 in savings? Here’s how I’d use it to target £880 of passive income each month

I wrote all the ways I could think of to earn passive income on pieces of paper. And then I threw them all away, except for this one.

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There are all sorts of ways to try to generate some passive income. Some people go for buy-to-let, some do Airbnb. I know someone who has thousands of photos in image libraries, and gets income from that.

I go for the stock market. But there’s none of that exciting get-rich-quick stuff for me. No, I could lose my shirt trying that.

I’m boring, and I go for blue-chip FTSE 100 companies that pay good dividends.

Even then, there’s risk. I mean, holding banks when the credit crisis hit? Gulp!

Spread the risk

I’d never put too much in any one stock, or even in one sector. It makes sense to diversify, and there’s a common feeling that holding around 10-15 stocks can achieve decent safety.

The other thing to do is hold for the long term, as most stock market slumps don’t last too long. The stock market crash of 2020 was painful, but the FTSE 100 is already back in profit.

So spread my money across a variety of dividend stocks, and hold for 10 or 20 years, or longer. That’s my chosen road to happiness.

Dividend returns

To see how it might work, let’s take a look at my Aviva (LSE: AV.) shares. Aviva is in insurance and financial services, and that’s the kind of business I think can create some nice long-term cash flow.

It’s an established big name too, so that should add a bit of safety. It can be cyclical though. Insurance sure has its ups and downs. And I think that’s the main risk with Aviva.

The share price may well be volatile, and I fully expect to face some painful times in the years ahead. And some years, I’m sure I won’t get such a good dividend.

Compound it!

But that’s what the long-term thing is all about. And holding for longer gives the miracle of compounding more chance to make me rich.

One-year’s ISA allowance of £20,000 could grow into a very nice sum from that 7% a year in dividends. To make the most of it though, I’d need to buy new shares with the cash each year.

If I stuck my 20 grand in Aviva shares and saved my dividends in a sack, I could collect £42,000 in cash in 30 years. That would give me a total of £62,000.

But if I plough the cash back into new shares, my total could reach a whopping £152,000. And then 7% of that should mean a bit over £880 each month in passive income.

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That’s not bad from a single £20,000 investment. Imagine how rich I could be if I could add another few thousand to it every year.

It’s worth repeating that I’d never put all my money into one stock like this. But over the long term, FTSE 100 shares have made average annual returns of around 7% — bang in line with my Aviva dividends.

So long-term profits like this, and the passive income from them, do seem realistic to me.

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.

Alan Oscroft has positions in Aviva Plc. The Motley Fool UK has no position in any of the shares mentioned. 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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