Here’s how £9,000 in savings could be used to target £343 a month of passive income
One way to turn money sitting idle into a passive income generator is to invest it in shares that pay dividends. Here is how an investor (whether experienced or new) with a spare £9,000 in savings could use this approach to target an average monthly passive income of £343.
Turning company profits into personal income
This is not an overnight scheme – quite the opposite. But a long-term approach to investing can be lucrative.
My example imagines an investor growing their money at a compound annual rate of 7.5% for 25 years. At that point the portfolio should be of a size that a 7.5% dividend yield would generate £343 in dividends a month.
The compound annual growth could come from dividends, share price increases, or both. But shares can move down as well as up, while dividends are never guaranteed.
By carefully selecting a diversified portfolio of blue-chip shares, I think a 7.5% target is realistic in today’s market. If an investor manages an even better performance than that, they might be able to speed the process up, or target a higher monthly income than £343.
One share to consider
I mentioned blue-chip shares above and one such share I think investors should consider for its passive income potential is financial services company M&G (LSE: BATS).
The FTSE 100 asset manager has proven its cash generation potential over many years. Although dividends are never assured at any company, M&G aims to grow its dividend per share annually, as it has done over recent years.
That could be lucrative, given that the dividend yield is already 7.8%. In other words, for each £100 someone put into M&G shares today, they would hopefully earn £7.80 in passive income annually.
Asset management is a massive market. It is also fairly resilient, as demand will likely be strong for decades to come.
That is both good and bad for M&G. It is good because a large market can mean sizeable profit potential. Less attractively though, a big market often attracts a lot of competition, potentially squeezing profit margins.
Fortunately, M&G has some strengths that can help it protect its competitive position, such as a strong brand and global customer base in the millions.
Getting ready to invest
It is all very well dreaming of passive income – and many people do. But simply dreaming of earning money without working for it is not enough to make it happen. That requires some sort of action.
At a practical level, a first step would be setting up a share-dealing account, Stocks and Shares ISA or trading app. Once the £9,000 is put into it, it could be used to invest.
The plan above is a long-term one, not some overnight get-rich-quick scheme. But I think it is rooted in a realistic approach that could hopefully be achievable.
The post Here’s how £9,000 in savings could be used to target £343 a month of passive income appeared first on The Motley Fool UK.
More reading
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. 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.
