3 steps to passive income of £333 per month

Passive and Active: text from letters of the wooden alphabet on a green chalk board

Getting paid for doing nothing sounds pretty good to me. And it’s entirely possible to receive hundreds of pounds every month by simply owning shares in UK companies.

Before we begin…

From the off, I’m assuming four things. The first is that I can put some money aside every month to invest. Naturally, that’s easier said than done in the current economic climate. If I did have money to put aside but also had debts (mortgage excluded), I’d ensure the latter were cleared first.

The second assumption is that I’m fully aware of the benefits that come from investing via a Stocks and Shares ISA, especially if I’m looking to make passive income.

Third, I’d need to be confident that I have enough patience to see things come to fruition. Investing can be life-changing but I can’t expect success overnight.

Fourth, I have to accept that the value of my investments can fall as well as rise and nothing’s guaranteed.

Still with me? Let’s go.

1. Buy passive income stocks

To start earning passive income, I need to own stocks. However, not all listed companies distribute cash to their shareholders. So, I need to ensure that what I buy comes with a dividend yield.

Fortunately, there’s no shortage of them in the UK market. But how do I narrow down the candidates?

Well, I wouldn’t focus on only those companies promising to return the most cash. Anything over, say, 6%, needs careful scrutiny, and over 10% is a potential red flag.

I’d focus on buying quality companies that look like they should be able to continue paying dividends.

Sometimes, one of the best strategies is to buy what I know. One example that springs to mind is food-to-go seller Greggs. Sure, times are tough and consumers are reining-in their spending. But does this mean doom for shareholders?

No way. Greggs is a beloved brand selling small-ticket items that people buy without hesitation. Although sticky periods are inevitable, I’m confident earnings can keep rising going forward.

And Greggs’s shares yield 3.3%.

2. Diversify (at least a bit)

One vital thing to keep in mind is that dividends can be cut in tough times. Some payouts may never return.

A way of mitigating it is to spread my money around. This might mean owning a housebuilder, a pharmaceutical, a consumer goods company… you get the idea. There’s no magic number, but between 15 and 20 stocks should be sufficient.

Unless I’ve got already got a big pot of cash to invest, that’s going to take some time. This brings me to my final point.

3. Do the maths

What will it take to actually see £333 or so hitting my account on a regular basis?

Well, let’s assume that I can get an average 5% yield across all the stocks I own. I might get more and I might get less. But this is definitely achievable.

For £333 a month at that rate, I’ll need £80,000 in total. That might sound like a lot but it’s amazing how quickly a portfolio can grow in value if I’m able to increase my regular savings over time.

And the great news is that I’ll be earning passive income as I go that can then be reinvested, ultimately earning me more passive income.

The post 3 steps to passive income of £333 per month appeared first on The Motley Fool UK.

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Paul Summers owns shares in Greggs. 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.