£3,000 in savings? Here’s how it could be used to start investing and earning a monthly passive income

Owning dividend shares can be a simple and lucrative way to earn a second income. Some people dream of such income — but do not actually start investing in the stock market.

If an investor had a spare £3k and wanted to start investing with the objective of earning passive income, here is how they might go about it.

Setting up a share-dealing account

The first step is a simple administrative one: having a way to buy dividend shares. There are lots of options, with a wide range of share-dealing accounts and Stocks and Shares ISAs available.

Understanding the basics of income investing

Some shares regularly pay dividends to shareholders simply for owning them. But not all shares do – even if they have in the past. On top of that, some shares may pay dividends but fall in value so much that owning them for a period of time can be loss-making overall, not profitable.

So before plunging into the market, it makes sense to get to grips with some important concepts like how to value shares, how to judge whether a company looks likely to keep paying a dividend and how to manage risk. £3k is a big enough sum to diversify a portfolio across a few dividend shares.

There are some great dividend shares out there

While not all shares pay dividends, some do – and in a big way.

When choosing dividend shares for my portfolio, I consider whether a company’s business model means I reckon it looks likely to generate enough free cash flow to pay out chunky dividends in future.

For example, one share I think investors looking for passive income should consider is British American Tobacco (LSE: BATS).

The FTSE 100 firm makes and sells cigarettes and other tobacco products. That is a very lucrative market, thanks to high profit margins, a captive audience, and British American’s portfolio of premium brands.

Large free cash flows enable the company to pay a dividend each quarter. The annual payout has risen each year this century.

Whether it will last remains to be seen. Cigarette sales volumes are still substantial but they are declining in key markets almost every year. It is yet to be proven whether British American’s range of non-cigarette products can take up the slack when it comes to smaller cigarette revenues.

Monthly income now, or in future

Some other FTSE 100 shares also pay dividends quarterly. Some pay less frequently. With the right selection, it should be possible for an investor to earn some passive income each month.

British American yields 7.5%. That means that each £100 invested will hopefully generate £7.50 in dividends annually.

That 7.5% is well above the average FTSE 100 yield, but in today’s market I reckon a 7% yield is achievable while sticking to blue-chip shares.

If someone starts investing today with £3k at a 7% yield, that would mean over £200 of passive income each year.

Alternatively, they could initially reinvest (compound) the dividends to target larger passive income streams further down the line.

The post £3,000 in savings? Here’s how it could be used to start investing and earning a monthly passive income appeared first on The Motley Fool UK.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report — 5 Shares for the Future of Energy — and discover:

Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

More reading

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Unilever. 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.