There are various ways to earn passive income in the internet age. Affiliate marketing, dropshipping, and selling e-books are some. My own preferred method is to invest in dividend-paying UK stocks.
The income from these is truly passive because I don’t need to maintain a website or interact with customers. It just appears in my investing account because I’m a shareholder of the company.
I can buy more shares with this (known as dividend reinvesting or compounding) or simply take it out as passive income.
The last dividend I received was from equipment rental giant Ashtead on 10 September. A handful of other UK firms are due to pay me a dividend this month too:
| Dividend payment date | |
| Games Workshop | 16 September |
| London Stock Exchange Group | 18 September |
| HSBC | 27 September |
| Legal & General (LSE: LGEN) | 27 September |
| BlackRock World Mining Trust | 30 September |
| The Renewables Infrastructure Group | 30 September |
Here, I’ll outline an actionable plan for how I’d target a £500-a-month passive income stream.
The maths
Most firms pay dividends either twice or four times (quarterly) a year. So I’d be aiming for £6,000 a year to get my average of £500 a month.
How much I’d need to invest to earn that amount would depend on the dividend yield of my portfolio. If it was yielding 5%, for example, it would take £120,000. For a 7%-yielding portfolio, I’d need £85,700. At 10%, it’d be just £60,000.
The great thing about investing is that it’s flexible. I can start small and work up to my income target over time.
Tax-free passive income
Right now, I can earn tax-free returns (including dividend income) on £20,000 a year in a Stocks and Shares ISA. There was talk about a ‘British ISA’ that would bump this up to £25,000, but that idea appears to be getting scrapped by the new government.
Nevertheless, if I was able to max out the £20k allowance, it’d take me just over four years to be generating £500 a month in passive income from a 7%-yielding portfolio.
Of course, £20k a year — the equivalent of £1,666 a month — might be unaffordable when I first start out. Ten grand a year — £833 a month — might be more realistic. In this scenario, it’d take me just over eight years to reach my target.
I think it’s entirely realistic to aim for a dividend stock portfolio with a 7% yield. But there’s no guarantee my ISA will reliably generate such an amount. Payouts can be cut or even axed altogether.
Therefore, I’d need to do my homework and target companies whose earnings aren’t built on sand to give myself the best chance of success.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Monster yield
Returning to my September list above, I think Legal & General’s the perfect example of a solid dividend stock. The financial services provider is sporting a mouth-watering 9.1% yield.
Better still, that’s tipped to rise to nearly 10% by 2026! That would go a long way to laying the groundwork for my 7% portfolio target.
But what’s the catch? Well, there’s a risk that interest rates stay higher for longer, heaping pressure on its customers and knocking earnings and assets under management.
However, I think that monster yield makes it a risk worth taking. The 188-year-old firm has an excellent balance sheet, strong brand and large customer base.
Looking ahead, I also think that pensions and life insurance aren’t bad businesses to be in, considering the rapidly ageing global population.
