Every month, cash dividends flow into my stock account. This is how I generate passive income – and it’s just as good as it sounds. I do nothing. But the money keeps coming.
Owning dividend shares isn’t the only way to earn passive income, of course. But many of the other methods sound like a lot of hard work to me, especially buy-to-let properties.
And that’s not all: by keeping my investments in a Stocks and Shares ISA, I can invest up to £20,000 each year without having to pay tax on my earnings.
Of course, buying shares is not without risk. In order to make sensible decisions, I need a certain amount of knowledge about the stock market and investing.
But by focusing on large dividend-paying FTSE100 With stocks, I can make the learning curve more manageable. And now that I have some investment experience, I can make decisions quicker and easier than when I started.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is for information purposes only. It is not intended to be, nor does it constitute, tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.
A dividend yield of 10%
I wouldn’t invest all my money in a dividend stock. That would be too risky, as dividends are never guaranteed and stock prices can fall. If something goes wrong, I could lose all my income and part of my original capital.
To diversify my risk, I would perhaps target 12-15 dividend stocks and buy them gradually over time. One stock I am considering today is the FTSE 100 Savings and Investment Group M&G (LSE: MNG).
This well-known company has a long history in the UK and offers one of the most generous dividends on the market, with a current yield of 10%.
Currently, much of M&G’s dividend is funded by the older part of the business, which manages certain investment products that are no longer sold. These generate a lot of money and are a good support for the dividend at the moment.
Still, the money from older products will eventually have to be replaced by profits from new sales. The biggest risk for me is that CEO Andrea Rossi’s efforts to stimulate new business growth will not succeed.
I can’t be sure how things will turn out, but M&G’s recent results have been in line with company forecasts and make me think Rossi’s plans are on track. I would have no hesitation in buying M&G shares.
Building a regular income
If I managed to raise £14,000 today to start a new investment in M&G shares, I reckon that with a little patience I would have a good chance of turning this into a monthly income of over £1,000.
Here’s how it might work: First, while I’m still working, I’d reinvest all my dividends and use them to buy more shares. Assuming M&G’s share price and dividend remain unchanged for the duration of my investment, reinvesting the dividends could leave me with a holding worth £151,685 in 25 years.
If everything else remains the same, this would give me an annual dividend of £15,168 or a monthly passive income of £1,264.
Building a passive income like this takes time. But it doesn’t necessarily require a lot of work, so I can focus on other things.
The post £14,000 put aside? Here’s how I’d use it to aim for a passive income of £1,264 a month appeared first on The Motley Fool UK.
Further reading
Roland Head does not own any of the stocks mentioned. The Motley Fool UK has recommended M&G Plc. The views expressed in this article about the companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
