Here’s how I’d invest £200 per month to target a passive income of over £7,100!

Christopher Ruane walks through the mechanics of putting a couple of hundred pounds each month into shares to earn passive income in future.

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Buying shares to earn passive income has worked for millions of people over centuries.

It does not always work: dividends are never guaranteed, so it is important to choose carefully.

But by taking time and research to try and buy into great companies when their shares offer both a good share price and strong income prospects, I think I could aim to build up substantial long-term passive income streams even from relatively modest contributions.

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If I had a spare £200 per month to put into this plan, here is how I would target annual passive income of £7,100 over the long term.

Buying shares that generate unearned income

Critical to this plan is finding the right sort of shares. I want to buy into companies that I think could generate sizeable excess income they can use to fund dividends in future.

Although my focus is on income, I also want to make sure I do not pay too much for the shares, as otherwise I risk ending up selling the shares at some future point for less than I paid for them, even if I have received dividends along the way.

Even the best seeming share can disappoint. So I would diversify my portfolio across different companies.

One share to consider buying now

As an example of the sort of share I think investors (including new ones) should consider buying to try and set up long-term passive income stream, consider one I own: Diageo (LSE: DGE).

The firm owns a host of premium drinks brands, from Johnnie Walker to Smirnoff. The market for alcoholic drinks is a large one and I expect it to remain that way. Owning premium brands gives Diageo pricing power. That helps it generate sizeable free cash flows. That has allowed it to raise the dividend annually for over three decades.  

Created with Highcharts 11.4.3Diageo Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Will that continue? Younger consumers are drinking less alcohol now than earlier generations did and Diageo has been grappling with how to tackle declining demand in Latin America specifically.

But looking at the whole picture, I am upbeat about the long-term dividend prospects of owning the share.

Dividends can add up!

At the moment, Diageo’s dividend yield is 3.1%. So for every £100 I invest today, hopefully I would earn around £3.10 in dividends annually if the payout per share stays where it is now.

In the current market I could target a higher average yield – say 7% — while sticking to blue-chip shares in proven businesses.

If I invested £200 a month and reinvested the dividends along the way (a very powerful move known as compounding), at an average yield of 7%, I would be earning over £7,100 in dividends after 20 years.

I’d make the first move now!

That plan strikes me as realistic, affordable, and potentially very lucrative.

Whether with £200 a month, higher or lower, my first move would be an immediate one, now. I would set up a share-dealing account  or Stocks and Shares ISA and set up my regular monthly contributions.

Should you invest £1,000 in J D Wetherspoon Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if J D Wetherspoon Plc made the list?

See the 6 stocks

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.

C Ruane has positions in Diageo Plc. The Motley Fool UK has recommended Diageo 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.

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