Investing in UK shares can be an excellent way to earn passive income. That’s because there are so many high-yield dividend shares listed on the London Stock Exchange.
But first, I’d need to build a pot of money. And the simplest way to do so is to save and invest a fixed amount every month. Regular investing can have several benefits.
For instance, I wouldn’t need to remember to add money. Once set up, my Stocks and Shares ISA or regular investment account would get funded with fresh cash every month.
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Investing regularly is a great habit to build and can set the stage for a juicy passive income in the future.
Running the numbers
If I’m starting from scratch, it’s going to take some time to be able to withdraw a sizeable income. To receive a £10,000 annual passive income, I calculate that I’d need a pot worth around £143,000.
And by investing £250 a month, I estimate it will take around 21 years to hit this target.
Of course, I could achieve my goal much faster by increasing my monthly investment or aiming for a higher return.
I’ve assumed that my investments will manage to achieve at least 7% a year. That’s not too far off long-term historical returns, but I’d say it’s a conservative assumption.
To keep it simple, I could choose a diversified selection of dividend shares.
While I’m building my pot, I’d reinvest the dividends to compound my returns over time. Then when I’m ready to take a second income, I’d withdraw the dividends in cash.
Picking dividend shares
To find the best dividend shares I’d look for some specific criteria. First, I’d consider UK shares that offer a dividend yield above 5%. Note that the total return for a stock investment is a combination of dividends and share price gains.
As such, I’d look for companies that have the potential to grow earnings and offer dividends. This could be from large, mature, and established businesses. Or it could be from small, high-growth and newer companies.
Both of these groups have their merits and disadvantages. But I’d diversify across a range of shares to avoid putting all my eggs in one basket.
One method to pick shares is to “buy what you know”. It’s a philosophy popularised by veteran investor Peter Lynch. By owning a stock of a firm where I’m a customer, I might be able to better understand its potential as an investment.
Top UK shares
Right now, if I had spare cash to invest £250 a month for a new passive income plan, I’d buy shares in Rio Tinto, Legal & General, and Greencoat UK Wind and Vistry Group.
This selection would offer a 7% dividend yield in a diversified group of UK shares. Bear in mind that much can change when making a long-term investment. As such, I’d still need to monitor my selection to ensure it continues to meet my criteria.
