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Investing in blue-chip stocks that pay their owners regular dividends is my definition of passive income. I earn money and I don’t have to work for it.
Using this method does not have to be expensive. If I had £200 to spare every month, here’s how I could use it to put the stock market to work on my behalf!
Getting into the habit of saving
First I’ll set up a shares trading account or a Stocks and Shares ISA and start making monthly deposits. I believe that saving a fixed amount on a regular basis can be a good financial habit to get into.
Soon the money would start to add up to the point where I could start buying stocks. Before doing that, I would take the time to learn about important concepts like valuation and how dividends are funded.
Shares are not guaranteed to last, so I would like to buy reasonably priced firms that I felt confident could take care of their payouts.
An example of one share I can buy
As an example, think of one share that I could buy more for income if I had spare cash to invest. Corner Legal & General (LSE: LGEN), which I already hold in my portfolio.
I FTSE 100 financial services provider focused on the retirement-related market. That’s huge and likely to remain so for decades. It has several strengths that help it compete, from an iconic brand to a large customer base.
That has helped it remain profitable in recent years. It has also raised its dividend every year for most of the past 15 years and plans to continue to do so, albeit at a lower rate than before.
Currently the dividend yield is 9.5%, which means if the dividend is maintained at its current level investing £1,000 today should bring me £95 a year in passive income.
Remembering accidents
However, the reduced rate of increase points to risks. For example, if a recession leads policyholders to cash out, Legal & General could see profits drop.
That’s the kind of risk (and every stock has some) that explains why I always keep my portfolio diversified among different stocks.
That 9.5% is an unusually high yield and above the average for Legal & General’s FTSE 100 peers. But if I pick the right stocks I think I can average, say, 6% while sticking to proven blue-chip companies.
If I did that, my initial investment of £2,400 should earn me an annual income of £144. But I can build on that by maintaining my £200 monthly investment habit and reinvesting my earnings. That simple but financially powerful move is known as consolidation.
By putting aside £200 a month and compounding at 6% per annum, after ten years I will have a portfolio worth over £32,000. At an average yield of 6% I should get an income of £1,950 a year, or about £163 a month.
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