Every month I receive passive income. That’s money I earn without having to work for it.
My approach to this monthly passive income stream has been very simple. I don’t spend time setting up wacky or unproven income streams. Instead, I have set up a monthly passive income stream by investing in FTSE 100 shares.
That involves shares in a variety of companies. But here’s how I could receive monthly passive income by investing in just three different shares.
Companies do not pay out dividends at the same time. Some pay none, some pay annually, and many pay twice a year, with an interim dividend followed later by a final one.
However, some UK shares pay on a quarterly basis. By investing in three of those, I should be able to receive monthly passive income. It just requires a bit of research on my part.
For example, tomorrow Imperial Brands will pay out a quarterly dividend. Its payouts are scheduled for March, June, September, and December. I’m looking forward to receiving passive income from Imperial tomorrow.
Last month, I got income for no work from Imperial’s tobacco rival British American Tobacco. Its dividend calendar runs a month before Imperial’s. Next month I could receive a dividend from GlaxoSmithKline if I held its shares. The GSK dividend calendar foresees payouts in January, April, July, and October.
With those three choices, I would hope to receive passive income on a monthly basis.
Risk diversification for passive income
To be clear, I wouldn’t choose a share based on its payout date – I would assess a company’s business potential and likely ability to generate passive income.
Dividends are never guaranteed. GSK has already said its dividend will likely be cut following a demerger of its business. For my own portfolio, I would want to spread my risk across more than three shares. Holding two-thirds in one sector, as in this example, heightens my risk. For example, the tobacco industry could be hit by declining numbers of smokers. That would reduce the companies’ ability to pay dividends.
That’s why I have chosen to invest in a broader portfolio of companies and sectors.
The point of my example is to highlight that the timing of dividend payments could have a significant impact on my passive income streams. If I only wanted to put money in shares and wait for long-term capital appreciation, that might not matter. But with an objective of earning passive income, a monthly stream could match more neatly to my regular outgoings. By contrast, investing in some shares could mean receiving no passive income for months on end and then suddenly getting a pile of dividends all in one month.
Based on this thinking, there are a couple of action steps I would take.
First, I’d consider what my passive income goals are. Does it matter if money arrives unevenly or would I prefer to target a regular income goal?
Secondly, I’ll continue to bear this in mind when constructing and adjusting my portfolio. I wouldn’t buy a share just because of its payout schedule. But instead of focusing just on how much passive I’d hope a share would produce, I’ll also look into when it might be paid.
christopherruane owns shares of British American Tobacco and Imperial Brands. The Motley Fool UK has recommended GlaxoSmithKline and Imperial Brands. 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.