£9,000 in savings? Here’s my 3-step approach to aiming for £1,794 in income

By putting some of the remaining savings into equity shares, it is possible to set up passive income streams that help put some of the profits of blue-collar firms into our pockets.

If I had money today – say, £9,000 – here are three steps I could take to get the ball rolling on the long-term goal of an income of £1,794 each year from that approach.

Step 1: turn savings into investment money

My first move would be to set up a trading account or a Stocks and Shares ISA, and park £9K in it.

That way, as soon as I found stocks to buy I would be ready to act.

I say ‘shares’ because no matter how much I like the investment opportunity, I can spread £9K over a list of shares to reduce my risk if one goes wrong. It happens.

Step 2: choosing the stocks to buy

Next, I would begin the process of finding stocks to add to my portfolio.

With thousands of companies listed on the UK and US markets alone, it can seem overwhelming to decide where to start.

My approach would be to stick to business areas that I understand and feel have the potential to generate long-term profits. I’ll then highlight companies with a proven business model and competitive advantage that I think can help them continue to make more money to fund dividends for years or decades to come.

A share of money to consider

As an example, one share that I think income investors should consider buying ITV (LSE: ITV).

I FTSE 250 the broadcaster has a legacy business that continues to generate profits due to advertising. Over time that may come down and the costs of integrating digital operations can eat into profits.

But, in the meantime, the business continues to generate more revenue than ever – and the company has been building its digital offering.

In addition to that part of the business, the other part of ITV is the studios and production business. That helps protect it from the ups and downs of advertising demand, as it can make money by renting out its resources and services to various developers.

Currently, ITV’s dividend yield is 6.8%.

Step 3: increase useless inbound traffic

Assume I invested £9K with an average yield close to that, 7%. Although he is around twice FTSE 100 average, in the current market I think it is achievable.

So, 7% of £9,000 is £630 a year. As a starting income I think that makes sense.

But I could try and do better – a lot better – by taking a long-term approach. That’s thanks to one simple move, known as compounding. That means I use the dividends I get to buy more shares.

Assume that I have compounded my dividends for 15 years at an average annual rate of 7%. After 15 years, I should be earning £1,794 in passive income each year.