There are different ways to earn passive income. Rather than taking a punt on some unknown idea, I prefer simply to invest in proven blue-chip businesses I expect to pay dividends out to shareholders in future. And ones that can start paying dividends — literally — very soon.
But there can be even bigger money for those who are willing to take a long-term approach.
If I had a spare £9,000 and wanted to target a monthly passive income averaging just short of £400 over the long run, here is how I would go about it.
Keeping things simple
My approach would focus on keeping things simple rather than complicating them. So I would only invest in blue-chip companies with proven business models.
I would stick to areas I understood and felt able to assess. I would only buy when I felt the shares offered me good value. I would also avoid any shares where the risk level felt too high for my comfort level.
Finding income shares to buy
No matter how hard I work to find what I think looks like a brilliant share however, I could be wrong. Companies can run into unforeseen problems. So I would split my money over a few different shares to give me some diversification. I think £9,000 is comfortably enough to do that.
As an example of the sorts of shares I am looking for in my passive income portfolio, consider one I own already: Legal & General (LSE: LGEN).
The FTSE 100 financial services provider is in the staid but lucrative business of retirement-linked financial products. That is a market that has high demand, often sees long-term customer relationships and that I expect to last for the long term.
With a large customer base, strong brand and deep expertise in financial markets, Legal & General has proven consistently profitable in recent years. In the first half of this year, the firm’s profit after tax attributable to equity holders was £223m.
The company cut its dividend during the 2008 financial crisis. I see a risk that if the market does badly in the coming year or so, we could see another such cut. The company could potentially have to deal with clients cashing in more policies than usual just as moving share valuations increased the pressure on meeting its capital requirements.
Overall though, I like the company — and its dividend yield of over 9%.
Building bigger income streams
If I invested £9,000 at a 9% average yield, I ought to earn around £810 in passive income annually.
That is good, but falls short of my target. Plus, 9% is well above the FTSE 100 average yield. So let me illustrate with a 7% dividend yield. That is still well above the average but in today’s market I see it as achievable while sticking to the approach I outlined above.
If I reinvested my dividends and compounded the value of my passive income portfolio at 7% annually, after 30 years my portfolio should be generating £399 each month in dividends.
All for £9,000 in a share-dealing account or Stocks and Shares ISA now!
