Tucking some spare money into blue-chip shares can be a straightforward way to earn some passive income, in the form of dividends.
It can be lucrative too. In this example I will show how less than £10k today could earn close to £300 a month in passive income over the long term.
Sound too good to be true? Let me walk through the details of how such a plan can work.
Three factors that determine the income stream size
To know how much passive income this approach might generate, we need to look at three things.
One is the amount invested. Here, it is £9k. A smart first move would be to put that into a share-dealing account or Stocks and Shares ISA, ready to invest.
The second variable is timeframe. I believe in the long-term approach to investing and in this example imagine compounding for 25 years (reinvesting the dividends) before then taking them out as passive income when they get paid.
The third factor to consider is the average dividend yield earned. This example presumes 7%.
How this plan could work in practice
Seven percent is just over twice the FTSE 100 average yield right now. However, I think it is realistic even while sticking to a diversified portfolio of carefully-selected blue-chip shares – and £9k is ample to diversify.
As an example, one FTSE 100 share I think investors should consider is insurer Aviva (LSE: AV). It yields 6.1%, so as part of a mixture of shares, it could help generate an average 7% yield overall.
Insurance is a big market and I reckon it will be for the foreseeable future. The number of customers is vast and the sums involved can be substantial.
Aviva has more UK customers than any rival and that is set to grow with the planned takeover of Direct Line. I do see a risk though, as integrating that troubled business could distract Aviva from its day-to-day focus on the existing operations.
This week, the firm announced that business remains robust, with general insurance premiums in the first quarter growing 9% year-on-year.
Since a 2020 dividend cut (always a risk with any share), Aviva has steadily grown its annual dividend per share. It plans to keep doing so, although these are never guaranteed.
Setting the ball rolling
Compounding £9k at 7% annually for 25 years, then drawing down dividends at a 7% yield, would mean that once the waiting was over, someone should earn a little over £285 each month, on average.
I realise it is indeed a long wait, although time often flies by faster than we expect. But this is not some pie-in-the-sky passive income plan. It is a well-considered approach to generating hopefully sustainable passive income flows while doing very little and investing in blue-chip companies with proven business models.
