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Investing money in blue-chip dividend shares is one approach to setting up passive income streams. Not only does that let someone benefit from the hard work of a company with a proven business model, but it can also be tailored to an investor’s personal financial circumstances.
To illustrate, here is how someone with £20k of savings and a willingness to invest for the long term could target £841 on average each month in passive income.
Calculating likely income
That figure is based on the £20k being compounded at 9% annually for 20 years, at which point a 9% yield on it would amount to an average £841 of passive income each month.
The compound growth can come from a combination of dividends and share price growth, although any share price falls would eat into the overall return.
At the moment, the average FTSE 100 yield is around 3.4%. Some blue-chip shares in the flagship index yield much more than that though.
So the investor could practically aim for that 9% compound annual growth rate from a mixture of dividends and share price growth. To reduce risk, it would be sensible to diversify the portfolio across a few different shares. Twenty grand is ample for that.
Finding shares to buy
What sort of shares might deliver the sort of 9% compound annual growth rate I mentioned above as part of the long-term passive income plan?
One I think investors should consider is M&G (LSE: MNG). The name is well known and has a storied history even though it has only been listed as an independent company for a few years.
The FTSE 100 asset manager yields 7.8%. It also has a progressive dividend policy, meaning it aims to grow its dividend per share each year.
Dividends are never guaranteed at any company however. M&G does face risks and one I have been concerned about is investors withdrawing more money from its funds than they put in. If that continues, it could hurt profits.
A recent tie-up with a large Japanese firm (Dai-ichi Life) could help attract new customer investments.
With a market capitalisation of £6.2bn, I see M&G as attractively priced given its strong brand, proven model and customer base in the millions. That could mean there is scope for a higher share price in future.
Starting in a practical way
Dreaming of passive income is one thing – but it takes action to make it a reality. One practical first step could be for an investor to set up an account that lets them put the £20k to use in the stock market, buying income shares.
That might be a share-dealing account, Stocks and Shares ISA or trading app. With lots of options available, it makes sense to spend some time figuring out what suits an individual’s needs best.
