Earning money without working for it is appealing for obvious reasons. But I find a lot of passive income ideas seem overly complicated.
By contrast, my approach to earning such money is investing in blue-chip shares I hope will pay me dividends in future. Doing that could hopefully mean I set up substantial income streams without having to do much at all.
To target £203 per month in passive income using that approach, here is what I would do.
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1. Have a share-dealing account ready to use
I would put my £9,000 into an account that lets me buy and sell shares.
If I did not already have one, I would set up a share-dealing account or Stocks and Shares ISA. There are lots of different choices available, so I would pick one I felt suited my own circumstances.
2. Choose how to invest
My next move would be to set an investment strategy.
That may sound easy: I want passive income, so I would concentrate on income shares over growth shares.
However, income shares come in all shapes and sizes. Just because a company has paid a big dividend before is no guarantee it will keep doing so. An example is Vodafone. The FTSE 100 telecoms giant has a double-digit percentage yield. But it has announced plans to cut it in half.
To reduce the potential impact of such moves on my passive income, I would diversify my £9,000 across five to 10 different shares.
Still, choosing the best possible shares would help me. So I would make a shortlist of shares in areas I understand that I think offer the right combination of passive income potential, risk and value.
3. Finding shares to buy
Doing that, I would then start buying shares.
As an example, consider one I already earn passive income from: M&G (LSE: MNG).
The asset manager operates in an area I expect to benefit from high and resilient long-term demand. But so too do lots of other firms.
Fortunately, I think M&G has some attributes that can help set it apart from such rivals, from a strong brand name and large client base to long experience in the financial markets.
From an income perspective, its 9.3% dividend yield is attractive. The company also aims to maintain or increase the payout per share each year, though having an objective does not necessarily guarantee that it will be met.
There are risks. A financial crisis could lead investors to pull out funds, hurting profits. Still, as a long-term investor, I continue to hold M&G happily.
Aiming for my target
M&G is a high-yield share. Even aiming for a lower 7% average yield would be handily beating the FTSE 100 average, though in today’s market I think it is realistic while sticking to quality companies.
Doing that, I would get £630 per year. But if I reinvested the dividends, compounding my portfolio valuation at 7% annually on average, after 20 years I would hopefully be earning over a couple of hundred pounds a month in passive income.
