The idea of earning money without working for it appeals to a lot of people. Making moves to put a passive income plan into action is necessary, though, if the dream is to become a reality.
Here is how I would aim to generate an additional monthly income of £500 from dividend shares, in five steps.
1. Clarify my objectives
First, I would get crystal clear about what I want to achieve. Do I need a regular monthly £500, for example, or would an annual £6,000 giving me a monthly average of £500 spread unevenly across the year suit my purposes?
2. Set up a share-dealing account
My plan involves buying dividend shares. I will not be ready to do that immediately, but when I do have the funds to buy and have chosen some shares, I would like to make a move without waiting.
So I would set up a share-dealing account or Stocks and Shares ISA before I had my eye on any particular shares.
3. Get the money to invest
If I invest in shares that pay me an average of 5% each year of the price I pay as dividends (what is known as the dividend yield) then to try and generate £6,000 in passive income annually, I would need to invest £120,000.
If I had a spare £120,000 today I could put it in my new share-dealing account straight away. What if I have precisely zero today? The same passive income plan can still work. But it will take time to build up to my monthly target as I put aside some money each month.
It may take years before I hit my monthly £5,000 target. But as I save and buy shares, I should at least start earning some passive income from dividends.
4. Find shares to buy
It may sound like saving money each month is the difficult part of this plan. But actually I do not think it is. After all, if you decide yourself how much you can afford to put aside on a regular basis, after a while it may become like second nature.
What I do see as difficult is deciding which shares to buy. There are thousands of shares I could purchase – where would I start?
Not all shares pay dividends and even those that do can stop them at any time. So I would hunt for companies I felt would continue to see strong demand in future. For example, I reckon people will still play fantasy games decades from now. That might interest me in Games Workshop.
I would look for companies with a competitive advantage that could help them make profits. Games Workshop owns the Warhammer franchise, for example, which is unique. Then I would look at the share price to see if I thought it was good value. Finally I would look at what the company’s future dividend yield is expected to be.
Even great companies can stumble, though, so I would buy shares in a range of businesses.
5. Enjoy the passive income
As I built my portfolio and started earning more passive income in the form of dividends, I would keep going. Saving and investing more, hopefully the income could not just reach £500 a month at some point, but pass that target!
