How to invest £300 a month in UK shares to target a £40,700 income

Investing regularly and consistently in UK shares is a proven strategy to earn some extra income for a more lavish lifestyle. Here’s how.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When it comes to dividends, UK shares are some of the best in the world. The London Stock Exchange is filled with mature industry titans offering impressive yields. In fact, looking across the FTSE 350, there are now more than 75 stocks paying out 5% or more in dividends each year. Some even venture into double-digit territory!

With so many income opportunities to pick from, investors can easily build a dividend portfolio. Even those with just £300 to spare each month can generate a substantial £40,700 income stream in the long run. Here’s how.

Earning £40,700 without lifting a finger

Regularly putting aside money each month is a terrific way to start a wealth-building journey. Even if this money is left in a boring interest-bearing savings account, in the long run, it can grow into a meaningful sum. But when put to work in the stock market, the returns can be far more substantial.

Looking at the FTSE 100, the British stock market has historically delivered around 4% in capital gains and 4% dividend yield each year for a total of 8%. However, by focusing on the more lucrative dividend opportunities in the UK’s flagship index, building a 6% yielding portfolio isn’t all that challenging. And by selecting prudently, the level of risk exposure won’t necessarily increase much either.

With that in mind, investing £300 each month at 10% for 30 years translates into a portfolio worth roughly £678,146 when starting from scratch. Flipping the switch and withdrawing the 6% yield at this stage would translate into a passive income of roughly £40,700.

Picking stocks intelligently

Obviously, the prospect of having an extra 40 grand in the bank each year without having to work for it is exciting. However, the previous calculation has made quite a few assumptions. Ignoring the threat of poorly timed market downturns over the next three decades, dividends don’t always go up.

Payments to shareholders often get put on the chopping block when market conditions turn sour. Therefore, to avoid falling into traps, investors need to hunt down income-generating businesses capable of maintaining dividends even when times are tough. Looking at my own income portfolio of UK shares, Greencoat UK Wind (LSE:UKW) seems to fit that bill.

The business generates revenue from selling clean electricity generated by its expanding UK wind farm portfolio. Since households and businesses constantly need energy even during market downturns, the group’s cash flows have been understandably resilient over the years. So much so that the firm recently hiked shareholder payouts for the ninth year in a row. And with a dividend yield sitting just shy of 8%, investors are enjoying a chunky amount of income.

Of course, even a highly cash generative enterprise like Greencoat isn’t without its risks. Renewable energy infrastructure isn’t cheap. And the group has historically relied on debt financing to fund its portfolio expansion – something that’s now considerably more expensive to do on the back of higher interest rates.

So far, the firm has managed to stay on top of its obligations to debt and equity holders. However, with no pricing power, should electricity prices fall, Greencoat’s earnings will likely fall with them. Nevertheless, the group’s track record speaks for itself, making it a risk I believe is worth taking.

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.

Zaven Boyrazian has positions in Greencoat Uk Wind Plc. The Motley Fool UK has recommended Greencoat Uk Wind Plc. 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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Are BT shares still a bargain after climbing 30%?

BT shares are finally showing signs of life after years in the doldrums. Harvey Jones thinks this may point to…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »

Investing Articles

How I’d invest £10k in a SIPP to target £28,000 annual passive income

Investing just £10k today in a SIPP could be the key to a chunky retirement income in the long run.…

Read more »

Investing Articles

How I could earn a second income worth £35,000

Millions of us invest for a second income. Our writer explains how he's making it work and shares tips for…

Read more »

Investing Articles

3 ways Labour could impact the Rolls-Royce share price

Labour have swept to power on a pro-worker, pro-business ticket. But how could the new government influence the Rolls-Royce share…

Read more »