Passive income is a hugely desirable target for virtually any investor, me included. The concept of being able to park my money in a stock that pays me a regular dividend is a fairly simple one. And the benefits and rewards of doing so are just as relevant today as they were decades ago. Even though it sounds simple in theory, I need to make sure I follow a few key steps to give myself the best chance of meeting and maintaining my goal of £350 a month.
A lump sum or regular chunks?
The first step I need to take is to decide whether I want to invest a lump sum or invest on a regular basis. A large part of this will come down to how much cash I have ready to go right now. For example, if I want to make £350 a month in passive income and am targeting a 6% dividend yield, I’ll need to invest £70,000.
I don’t have this kind of money lying around, so I’ll be investing smaller chunks on a regular basis to build up to my target level of passive income. What this involves is setting aside a chunk of cash each month. If I put £500 a month in dividend shares with the same target yield, I’ll reach my goal in nine years.
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This first step is key because it sets my expectations at a realistic level. Of course, it’s not set in stone, if I receive unexpected lumps of cash in years to come I can always speed up the process.
Picking the right stocks for passive income
The second step is to work out the stocks I want to invest in. This also ties in with my third step of figuring out what I want my average dividend yield to be. The perfect middle ground is to find dividend shares that have a solid track record of paying out income to investors. At the same time, if I can find a company like this that also offers me a high dividend yield, it ticks both boxes.
Usually, I have to compromise slightly on the yield in order to find a stable company. Earlier this year, the dividend yields of Polymetal International and Evraz were the highest in the FTSE 100 index by a long way. Yet these had to be cut due to problems with the situation in Russia. So these yields weren’t sustainable.
In terms of current dividend stocks that I’d buy, I like British American Tobacco, Taylor Wimpey and M&G. All three of these currently have a yield in excess of my 6% target.
Ongoing maintenance
The final step is to ensure that I keep investing over time to stick to my timeline. Investing each month means that I need to be active. So although the income received is passive, the whole process isn’t! In the years to come I might also have to rebalance my portfolio. If a stock cuts a dividend, I might need to sell it and put the cash in a rising stock. I know that my 6% isn’t guaranteed, of course. But overall, I think it’s worth the effort to be able to enjoy the benefits further down the line.
