£5,000 of savings? Here’s how to try and turn it into £158 of passive income a month

One way to earn passive income is to put money into blue-chip shares, sit back, and earn dividends.

That sounds simple – and it can be. But not all shares pay dividends and, even when they do, the amount is never guaranteed. So such a passive income plan can require a bit more planning.

Still, it can be potentially very lucrative. Here’s how someone with a spare £5,000 could aim to generate £158 of passive income a month, on average, over the long term.

The mechanics of dividend income can be simple

Taking a long-term approach matters here because it adds rocket fuel to the power of dividends. That is thanks to compounding. Basically that means reinvesting dividends, so hopefully dividends can themselves earn dividends in turn.

Say someone put £5k into the stock market today and compounded it at 7% for 25 years. It would then be large enough that a 7% dividend yield ought to generate £158 a month in passive income

A 7% dividend yield is well above the current FTSE 100 average of 3.3%. But I think it is achievable while sticking to high-quality shares in the current market.

Hunting for bargain dividend shares

To illustrate that, one share I think passive income hunters should consider is FTSE 100 asset manager M&G (LSE: MNG). Asset management is a large market with resilient long-term demand. Thanks to the big sums involved, even fairly modest-seeming commissions can add up.

That is good news for M&G, though it also means this can be a crowded field. One risk for M&G is clients withdrawing more funds than they put in, for example because rivals are performing better. It has been battling that challenge in recent years, though the first half of this year saw a net inflow of money to its open funds.

With a strong brand, long experience in the asset management industry and large global client base, I see M&G as having a number of competitive advantages.

It aims to grow its dividend per share annually and has managed to do so in the past few years. The current dividend yield is 7.9%.

Putting the plan into action

This approach to generating money without working for it will not earn a single penny if it stays only as a plan!

Fortunately, I do not think it is complicated to start putting it into action. However, doing so requires taking some steps. A useful first one in my view would be to set up a share-dealing account, Stocks and Shares ISA or dealing app and put the £5,000 into it. That can be then be used to start buying dividend shares.

There is no rush to put the money to use, of course: it is important first to find the right dividend shares to buy!

The post £5,000 of savings? Here’s how to try and turn it into £158 of passive income a month appeared first on The Motley Fool UK.

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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.

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