How I’d invest £200 a month to target a £1,000 passive income

Investing in quality dividend shares is a great way to earn regular and reliable passive income. Here’s where I’d start and what I’d buy.

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The stock market can be an excellent source of passive income. It’s home to thousands of dividend shares that make regular payments to their shareholders.

But before I even start thinking about withdrawing dividends, I need to grow a sufficient pot of savings.

Let’s look at this a bit further.

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Quick passive income maths

Investing in shares is often regarded as a long-term activity. Rightly so, in my opinion. But while I own stocks that I intend to hold for many years, I also want to create an additional passive income far sooner.

Bear in mind that this isn’t a get-rich-quick thing. It will still likely take five years to set up. For instance, let’s say I invest £200 a month over five years.

My aim is to earn an additional £1,000 a year thereafter, with minimal time and effort. It’s not life-changing, but it can certainly contribute to my next holiday.

And if I want to target a larger sum, I could just raise my monthly investment.

So, to achieve this bonus income, I calculate that I’d need to build a pot worth around £14,300.

And to reach this figure, I know that my shares would need to earn 7% a year. As it happens, that’s around the average stock market return.

Dividend shares

Finding a selection of the highest-quality dividend shares would be my next task. While I’m building up my pot in the initial years, I’d avoid taking the dividends out. Instead, by reinvesting them and buying new shares, I could benefit from the magic of compounding.

This should help my pot to grow faster.

Once I’ve reached my target portfolio size, I’m ready to start withdrawing passive income in the form of dividends.

And as I’ve been investing in dividend shares from the start, I wouldn’t need to change my selection.

Quality stocks

When looking for the best dividend shares, the FTSE 100 is a great place to start. It’s home to several high-yielding stocks.

But I have to bear in mind that dividend yields that are far greater than average might not be sustainable. So it’s important that investors look for other characteristics like a history of consistent dividend payments, a solid balance sheet and growing earnings.

I’d also look for companies that operate a stable business model with strong competitive advantages. These might be less likely to be disrupted and could provide more stable earnings and dividends in the future.

Finally, I reckon it’s important to diversify and spread my selection across several industries. This should prevent me from putting all my eggs in one basket.

Stock selection

Right now, if I had a spare £200 a month to invest in this passive income plan, I’d buy Taylor Wimpey, Legal & General, Rio Tinto, Phoenix Group, and BP.

On average, this selection currently offers a 7% dividend yield. They all have a substantial payment history and their dividends are well-covered by earnings.

Lastly, they’re spread across different sectors. Just what I’m looking for.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel has positions in Bp P.l.c. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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