£20,000 in savings? Here’s how it could realistically be used to target £633 of passive income each month
Do you currently have a practical plan to try and earn hundreds of pounds in passive income each month? Some people do, but many do not. Passive income ideas can often seem quite esoteric, making the whole idea of earning money without working for it sound a bit pie in the sky.
But in reality, there are plenty of such ideas that are firmly grounded in reality. One is investing into companies that will hopefully pay their shareholders dividends.
Here I explain how, by doing that today with £20k, someone could target hundreds of pounds in passive income each month in the future.
Why time can be an investorâs friend
When I say future, in this example I am presuming a 25-year timeframe before the income starts flowing. It would be possible to get it sooner â indeed, as soon as this year â but at a lower level.
Why wait? The shares will hopefully pay dividends but rather than take them as passive income straight away, they can be reinvested. This is known as compounding and can be a powerful force multiplier when it comes to investing. Basically, dividends in turn start to earn dividends. That is because they can fund the purchase of more shares.
Over the course of time that can all add up substantially. Compounding £20k for the 25 years I mentioned at 7% annually, it would grow by over five times, to a size big enough that a 7% dividend would equal £633 of monthly dividends.
Focusing on quality, with an eye on costs
Is a 7% yield realistic? After all, that is over twice the current yield of the FTSE 100 index of blue-chip shares. I do think it is realistic, even while sticking to high-quality shares.
Of course, some shares can disappoint and no dividend is ever guaranteed to last, so it makes sense to spread the £20k over a diversified range of shares.
That could be in a Stocks and Shares ISA or other share-dealing account, but whatever investing platform is used, it is useful to keep an eye on costs as they can eat into the returns.
Well-known broadcaster with a 6.7% yield
One share I think investors should consider at the moment for its long-term passive income potential is FTSE 250 broadcaster ITV (LSE: ITV). It yields a juicy 6.7%. It also aims to maintain its annual payout per share at least at the current level.
Still, with its well-known brand, strong broadcasting footprint and extensive production business, why does the share have such a high yield? Why does it sell for pennies, after falling 38% in price over five years?
It is always worth asking such questions, not only because they could be a risk to the dividend, but also because even for an income-focused investor, capital loss can be painful.
ITVâs revenue last year fell slightly, while its pre-tax profit was down by over a third. Digital competition keeps growing and, while ITV is investing lots in digital provision itself, that is a costly process.
But it continues to generate sizeable advertising revenue â something this summer’s football World Cup could boost handily. The production and studios business provides some insulation against the ups and downs of advertising demand.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.
