How to target a passive income of £45,000 a year from UK shares and hopefully never work again!

Investing in UK shares is a tremendous way of unlocking a passive income and making money while asleep. That’s because the London Stock Exchange houses some of the most generous dividend-paying companies in the world. And given enough time, a well-built portfolio can generate enough income to replace an entire £45,000 salary.

Here’s how to aim for that.

Invest, then relax

Right now, the FTSE 100 offers investors a 3.11% dividend yield. That means for every £100 invested in large-cap UK shares within an index fund, investors will earn £3.11 without having to do any work. Yet by being more selective with a stock-picking strategy, an investor can potentially double their passive income potential closer towards 6%.

If executed correctly, that means investors can earn £6 for every £100. And it drastically reduces the portfolio size needed to unlock the equivalent of a £45,000 salary from £1.45m to £750,000 – almost half.

Of course, three-quarters of a million pounds isn’t pocket change. But with £5,000 starting capital and a further £450 to spare each month, reaching this six-figure threshold is far more achievable than most might think.

Let’s assume a 6%-yielding portfolio also generates a 4% annual capital gain, in line with the stock market average. The combined total return is 10% a year. And drip feeding £450 each month at this rate of return, starting with £5,000, surpasses the £750,000 threshold in less than 27 years.

That’s perfect timing for a 40-year-old investor aiming to retire by 67. And those fortunate enough to start investing earlier could unlock an early retirement or continue working and investing to earn even more passive income.

So which UK shares offer a 6% yield today?

Exploring income options

Looking again at the FTSE 100, there are several stocks offering this payout or more. It includes Mondi (LSE:MNDI), Land Securities Group, and LondonMetric Property, among others. And the list gets even longer when looking to other indexes like the FTSE 250.

But as experienced investors know, just because a yield’s high doesn’t mean it’s a good investment. That’s because a high yield often comes with more risk.

So let’s take a closer look at Mondi. Is it an income opportunity or a trap?

Earning dividends from packaging

Mondi’s a leading manufacturer of sustainable packaging materials, playing a vital role in the logistics value chain, primarily for the industrials sector.

In recent years, Mondi’s been diversifying away from industrials to capitalise on the growing packaging needs of the e-commerce sector. That’s a smart move. Not just because e-commerce continues to grow rapidly, but because industrial manufacturing is currently in a bit of a slump.

Economic uncertainty has resulted in weaker manufacturing output across multiple regions, lowering demand for Mondi’s products. In fact, that’s why its shares have underperformed in the last 12 months, driving the yield to 6.9% today.

This demonstrates Mondi’s cyclical risk. And while management’s deploying cost-cutting measures, dividends are at risk of cuts if external market conditions don’t improve.

The industrial sector will eventually recover. But sadly, the exact timing of this recovery remains a mystery. So with that in mind, Mondi shares might not be a wise investment to consider right now in terms of risk-to-reward. Luckily, there are plenty of other income options to explore.

The post How to target a passive income of £45,000 a year from UK shares and hopefully never work again! appeared first on The Motley Fool UK.

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Zaven Boyrazian has positions in LondonMetric Property Plc. The Motley Fool UK has recommended Land Securities Group Plc and LondonMetric Property 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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