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Passive income ideas come in all shapes and sizes. Some seem more realistic and practical than others, to me.
My approach to topping up my earnings with additional income streams is to invest in dividend shares. Here is why I like this approach – and how I would use it to target £500 in monthly earnings.
The appeal of dividend shares
Passive income is all about earning money without having to work for it. But someone needs to produce some value if I am going to earn.
In the case of dividend shares, that value creation comes from the workforce of blue-chip companies such as Tesco and NatWest.
By owning shares in such companies, I could benefit when they divvy profits up among shareholders.
Here’s what I’d do
However, dividends are never guaranteed. So how would I go about trying to boost my passive income streams while carefully managing my risk?
My first step would be to get into a regular saving habit. If I want to earn £500 a month and invest in shares with an average yield of 6% (meaning I earn £6 in dividends annually for every £100 I invested), that target would require me to save £100,000.
That will take time. So the sooner I start saving to invest, the better! I would put the money into a share-dealing account, or Stocks and Shares ISA, ready to use it for buying shares.
Step two would involve me finding the right companies in which to invest. Sticking to businesses I understood, I would look for firms with a competitive advantage in an industry I expect to benefit from resilient customer demand.
My third step would be to buy! I would only purchase if I thought the share price offered an attractive valuation. So it may be that, having identified a business I like, I wait patiently for it to trade at an attractive price before buying. That could take years.
Fourth, I would build my portfolio. It is important not to put all my eggs in one basket. So over time as I earned more dividends and kept saving regularly, l would grow my portfolio in a structured way. I would always keep it diversified and continue my focus on buying into high-quality businesses at an attractive valuation.
The fifth step would be simply to sit back and let the dividends flow (hopefully!)
I could use them as passive income, or reinvest them to boost my funds. That way, although I may earn less passive income in the short term, hopefully I would build a bigger portfolio that could boost my earnings in future.
Setting a target
If I put £100,000 into a 6%-yielding share portfolio today, hopefully I could hit my target of earning £500 on average in monthly passive income soon.
But most people do not have a spare £100,000 lying around. In that case I could still use the same approach, but build up my investment pot over time with regular contributions.
That would take me longer to hit my passive income target – but hopefully I would get there sooner or later!