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One way many people earn passive income is by putting money into blue-chip shares of well-known companies, then earning dividends from them.
That has benefits, including being able to earn money from the successful work of proven businesses. One of the things I like about this approach is that it can be tailored to an investor’s individual financial circumstances.
So for example, I discuss an approach using £20,000. But the approach could be applied with less or more money, albeit the passive income streams created would vary accordingly.
Over £900 a month in income — like this
Before getting into the details, let me explain the simple maths involved. Investing £20,000 at an average compound annual growth rate of 8%, after 25 years it should be worth enough that an 8% yield would equate to £913 a month on average. So for 25 years the growth can come from share price growth, dividends or both. Then, when the passive income kicks in, from dividends.
Share prices can move down as well as up and dividends are never guaranteed. Still, I think the 8% target is achievable and realistic in today’s market.
Putting money to work today
A practical first step towards that goal would be putting the £20,000 in a place where it could be used to buy shares. So for example, a new investor could set up a share-dealing account, Stocks and Shares ISA or trading app.
Building a portfolio of income shares
One important risk management principle when investing is not putting all your eggs in one basket. In financial parlance, this is known as diversification. Twenty grand is ample to do that, for example by spreading the money evenly across five to 10 different shares.
In terms of long-term passive income potential, one share I think investors should consider is FTSE 100 asset manager M&G (LSE: MNG).
Asset management can be affected by the economic cycle. When people have less disposable income, they may invest less. Over time though, demand is high. The huge sums involved in the industry mean that even fairly modest fees and commissions can add up.
With its strong brand and large existing customer base, M&G is well-placed to tap into that. It also pays a chunky dividend, with the dividend yield currently standing at 7.7%.
No dividend is ever guaranteed to last, but some companies set out their goal. M&G does – its dividend strategy is to aim to maintain or grow the payout per share annually.
One risk I see is investors pulling more out of M&G funds than they put in. That has been a challenge for the company in recent years and, if it continues, could eat into profits.
Moving from dreaming to earning without effort
One thing about many passive income ideas is that they can seem a bit pie-in-the-sky.
By contrast, putting money to work by buying dividend shares in proven, profitable businesses makes a lot of sense to me. It is practical, genuinely passive and is already used by many people to supplement their income.
The sort of reinvesting (known as compounding) I discussed above takes time to have substantial effect – but it can certainly be worth the wait.
