How I’d start earning passive income from UK shares in 2021 with £250 a month

Earning a passive income from UK shares in 2021 could be more realistic than many investors realise. Here’s how I’d do it with £250 per month.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 5 December, 2020 10:30 am GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

UK shares offer a significantly higher passive income than other asset classes at the present time. However, the 2020 stock market crash showed they also carry greater risks.

As such, building a diverse portfolio of high-quality companies could be a sound move. Buying those shares that have dividend growth potential may further enhance an investor’s income return in 2021 and in the coming years.

Opening a Stocks and Shares ISA to make a passive income from UK shares

Before buying any UK shares to make a passive income in 2021, opening a Stocks and Shares ISA is a logical first step. It offers a low-cost means of efficiently investing money without paying capital gains or dividend taxes. Moreover, it’s simple to open an ISA, and withdrawals can be made at any time without penalty.

Should you invest £1,000 in Carlsberg Britvic right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Carlsberg Britvic made the list?

See the 6 stocks

FTSE 100 and FTSE 250 shares offer greater income returns at the present time than assets such as bonds and cash due to low interest rates. Meanwhile, high house prices make buy-to-let unaffordable. And with lower yields, that could also make it less attractive to income investors. However, as mentioned, shares are risky assets. Therefore, it’s imperative to build a diverse Stocks and Shares ISA that contains UK shares with resilient financial situations. Those that are able to deliver a robust passive income over the long run.

FTSE 100 and FTSE 250 dividend investing opportunities

Despite a recent stock market rally, many UK shares offer an attractive passive income at the present time. For example, SSE and GSK currently have 5%+ dividend yields. Meanwhile, utility stocks such as National Grid, Severn Trent and United Utilities offer 4%+ dividend yields that may prove to be relatively resilient in case of further economic challenges ahead.

In terms of dividend growth opportunities, stocks such as AstraZeneca, Unilever and Reckitt Benckiser could deliver attractive earnings growth in the coming years. This may filter down into a rising dividend for their investors. Meanwhile, stocks such as Imperial Brands and British American Tobacco could become more popular as they adapt to changing consumer tastes in the cigarette/e-cigarette categories. They’re also seeking to improve their balance sheets, which could strengthen their financial prospects in the years ahead.

Investing £250 per month in 2021

Clearly, investing £250 per month in UK shares is unlikely to produce a large passive income straightaway. However, over time, it can build to a surprisingly large portfolio size that goes on to offer a generous income return in the long run.

Many FTSE 100 and FTSE 250 shares are currently offering high yields compared to their historic averages after the 2020 stock market crash. So now could be the right time to start investing in a diverse range of dividend shares. They may offer high income returns in 2021, as well as dividend growth over the long run.