One practical way millions of people earn passive income is by buying shares in blue-chip companies like Tesco and Apple.
If I wanted to start doing that from scratch today, with a target of earning an average £500 per month in income from company dividends, here is how I would go about it.
1. Start saving
My first move would be to set a regular savings target for how much spare money I wanted to put aside. This could be monthly, weekly or even daily
The right amount would depend on my own financial circumstances. The more I save to invest, the sooner I should be able to hit my passive income target – but I need to be realistic too.
2. Get ready to invest
I would want to make sure that I was ready to invest as soon as I had sufficient money and had identified some shares to buy.
To that end, I would look into different options and choose the right share-dealing account or Stocks and Shares ISA for my personal needs.
3. Learn about shares
A common mistake new investors (and many experienced ones, in fairness) make is investing in what they think is a great business just because it is a great business.
Why is that a mistake, one might ask?
A great business is at the heart of a rewarding investment normally. But it is not enough.
The price one pays is also important. Paying too much can mean that an investor loses money even though a company does very well. That is why I would get to grips with concepts of how to value shares before buying any.
I would also learn about the stock market more generally to try and avoid some common beginners’ mistakes.
4. Find shares to buy
What sort of shares would I look to own to try and hit my passive income target?
Obviously the higher the dividends paid by a share relative to its price, the better my passive income prospects might seem. But I do not invest in a company just because of its dividend. After all, such payouts are never guaranteed.
Instead, I look at the source of possible dividends: how much free cash flow a company looks set to generate in years to come.
I like to invest in businesses that have large customer bases and some competitive advantage that can help them make a profit. `
5. Aim for the target
If the company is good enough and priced attractively, then I consider its dividend yield.
With a target of £500 per month my annual goal would be £6,000 in dividends. If I invested in shares yielding 7%, for example, that would mean I needed around £86,000 in my portfolio to hit my target.
The good news is that I could build up to such a portfolio size over time. That might take years or decades depending on the size of my regular contributions. But I ought to earn dividends along the way, as I built up to my passive income target.
