Here’s how to build £300 monthly passive income streams by investing £20K now
Investing in well-established giant companies can generate passive income. This approach has been successful for generations, although any specific company can never be relied upon to make regular dividend payments. Nevertheless, I am confident that holding a diversified mix of high-standard shares from established companies could provide me with a passive income stream for many years or even decades to come.
To put this into perspective, let's say I had an extra £20,000 to invest. Here's an example of how I would allocate that to generate, on average, £300 a month in passive income.
Doing the maths
Calculating the potential pay from owning specific shares is largely a straightforward process, albeit with the proviso that past outcomes are not a reliable predictor of what lies ahead.
Yield is essentially the annual return you can expect to receive in the form of dividends for every £1 invested, expressed as a percentage.
In my opinion, an attainable figure in current market conditions, I would estimate that, by focusing on blue-chip shares, I should receive approximately £1,400 in annual dividend payments.
A major warning - and a game-changer
As I mentioned earlier, the outcome relies on the decisions that businesses make regarding their dividend payments.
Not all companies provide dividend payments. Among those that do, some retain the same dividend payment rates for many consecutive years, while others may abruptly reduce or increase them. Consequently, identifying the right companies to invest in will be crucial to achieving success in this passive income strategy.
However, the annual sum translates to a monthly dividend income of around £116, which is a welcome influx of unearned cash, though still less than a third of my desired target.
That involves ploughing back dividends into shares to purchase additional shares, ultimately generating more passive income. Provided I continue this strategy, I should reach my goal of £300 per month by the end of 14 years.
It's crucial to locate the most suitable shares for investment at a competitively priced value.
Which type of shares would you be searching for to construct a diversified portfolio that generates an average return of 7% per annum.
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The UK FTSE 100 financial services organisation operates in a market which I believe will experience steady growth in the long term due to increasing customer demand. It holds a strong position to capitalise on this growth because of several key strengths. These include its well-established brand, substantial customer base, and years of experience and knowledge in the financial sector. Additionally, in recent times, it has been making efforts to attract younger customers by highlighting the environmental and social benefits associated with its investment products.
There are potential risks involved. Legal & General reduced its dividend payment during the 2008 financial crisis. A struggling economy could once again have a negative impact on the market, which might affect profit margins.
Making the first move
Although with its 9% dividend yield, I feel the current share price accurately reflects the level of risk. I believe the present price is a sound investment opportunity and so I intend to hold onto the shares.
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C Ruane has holdings in Legal & General Group Plc. The Motley Fool UK has no position in any of the mentioned shares. Comments on the companies mentioned in this article reflect the views of the author and might not align with our official views in our paid services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we think that weighing a variety of opinions can provide a fuller understanding.
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