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One way to turn money sitting idle into a passive income generator is to invest it in shares that pay dividends. Here is how an investor (whether experienced or new) with a spare £9,000 in savings could use this approach to target an average monthly passive income of £343.
Turning company profits into personal income
This is not an overnight scheme – quite the opposite. But a long-term approach to investing can be lucrative.
My example imagines an investor growing their money at a compound annual rate of 7.5% for 25 years. At that point the portfolio should be of a size that a 7.5% dividend yield would generate £343 in dividends a month.
The compound annual growth could come from dividends, share price increases, or both. But shares can move down as well as up, while dividends are never guaranteed.
By carefully selecting a diversified portfolio of blue-chip shares, I think a 7.5% target is realistic in today’s market. If an investor manages an even better performance than that, they might be able to speed the process up, or target a higher monthly income than £343.
One share to consider
I mentioned blue-chip shares above and one such share I think investors should consider for its passive income potential is financial services company M&G (LSE: BATS).
The FTSE 100 asset manager has proven its cash generation potential over many years. Although dividends are never assured at any company, M&G aims to grow its dividend per share annually, as it has done over recent years.
That could be lucrative, given that the dividend yield is already 7.8%. In other words, for each £100 someone put into M&G shares today, they would hopefully earn £7.80 in passive income annually.
Asset management is a massive market. It is also fairly resilient, as demand will likely be strong for decades to come.
That is both good and bad for M&G. It is good because a large market can mean sizeable profit potential. Less attractively though, a big market often attracts a lot of competition, potentially squeezing profit margins.
Fortunately, M&G has some strengths that can help it protect its competitive position, such as a strong brand and global customer base in the millions.
Getting ready to invest
It is all very well dreaming of passive income – and many people do. But simply dreaming of earning money without working for it is not enough to make it happen. That requires some sort of action.
At a practical level, a first step would be setting up a share-dealing account, Stocks and Shares ISA or trading app. Once the £9,000 is put into it, it could be used to invest.
The plan above is a long-term one, not some overnight get-rich-quick scheme. But I think it is rooted in a realistic approach that could hopefully be achievable.
