Earning money without working for it is appealing – and possible. Millions of people already do just that by buying shares in blue-chip companies and receiving passive income in the form of dividends.
If I wanted to target £200 each week in passive income, it might take me a long time to achieve my target, but I think I could manage it. Here is how.
Buying stakes of companies
A share is basically a slice (albeit a tiny one) of a business.
If I could buy a whole business, I would want it to be one that had a large customer base, a competitive advantage, strong profitability, and a healthy balance sheet.
For me, it is the same with buying a share.
Hunting future dividends
But not all companies matching that description pay dividends.
So I would also look to invest in firms I expect to generate large free cash flows in future which they can use to pay out as dividends. An example from my own portfolio is financial services company M&G.
As businesses can face unforeseen hurdles, I always keep my portfolio diversified. I think M&G has great dividend potential – but I do not want to rely just on that.
Dividend yield
From a passive income perspective, an important concept to understand is dividend yield.
At the moment, M&G has a dividend yield of 9.7%. That means that if I invest £100 today, I hopefully will earn £9.70 annually in dividends.
At that rate, to hit my £200 weekly passive income target (£10,400 per year), I would need to invest around £107,300. I could invest a lump sum now through my share-dealing account.
What if I don’t have that sort of money? I could simply drip feed money into my account on a regular basis according to my own financial circumstances. Doing that, I could build up my investments over years. It may take a long time to hit my £200 weekly target, but as I save and invest, I ought to earn at least some passive income along the way.
Focus on quality and value
M&G is a FTSE 100 share. It is not the only one that offers a yield close to 10% at the moment.
But many shares offer a lower yield. One mistake I would seek to avoid is simply chasing yield. After all, a dividend is never guaranteed and sometimes a high yield is a sign that investors think a company might axe its dividend (as happened at Direct Line this year).
So I would focus first on finding high-quality companies with attractive valuations. Only then would I start looking at their yields and what sort of passive income potential they might be able to offer me.
The post My £200 weekly passive income plan appeared first on The Motley Fool UK.
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C Ruane has positions in M&g Plc. The Motley Fool UK has recommended M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore 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.