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Passive income investing: my 4 steps to go from £0 to £500 a month

Jonathan Smith
·3-min read
Person using calculator next to charts and graphs
Person using calculator next to charts and graphs

I really like it when I write myself a list of things to do. And if I need to do something, I like to have several steps I can follow to get the job done. I think this concept is helpful at breaking up large tasks into smaller ones. In fact, I think it can be applied very well when thinking about passive income investing when starting from scratch.

Getting up and running

The first step I’d take if I was making £0 in passive income a month is to simply get myself started. To begin with, I need to look at how much I can afford to invest each month in dividend stocks. I want to look at the end goal (making £500 a month from passive income investing). At the same time, I can’t reach this level for several years, so I want to focus on right now and how much I can put away.

Let’s say I decide on putting away £1,000 a month and can move on to step two. This involves deciding the kind of dividend yield I want to target. Usually, the higher the yield, the more risky the stock. I also need to think about the yield in relation to both the FTSE 100 average, and other passive income investing ideas.

For example, the FTSE 100 average dividend yield at the moment is 3.13%. The highest individual yield is around 9%. So for step two, I’d probably decide to go for a target yield of around 6%. Going for the highest yield is risky as the company may be struggling with a falling share price, artificially pushing the yield up.

Step three now involves looking at the different companies that fit the bill of giving me around a 6% dividend yield. In order to be a truly passive investment, ideally I want to be able to invest in a company and leave my money there for years to come. I don’t want to keep having to buy and sell due to dividend cuts or company-specific issues. This makes step three (that is, doing my homework on which businesses to invest in) very important.

Passive income investing conclusions

After deciding and buying the group of stocks, there’s one final ongoing step in my passive income investing timeline. This involves ensuring I keep up my regular investments of £1,000 a month. It also involves reinvesting the dividends I receive, to enable me to get to my goal of £500 a month in dividend income quicker.

So how long should it take me to go from £0 to £500 a month in income? Steps one-to-three can be done in a few days, depending on how much time I can devote to the research. Assuming I start investing the £1,000 in month one, I’ll get to my goal of averaging £500 a month in passive income around halfway through year seven.

But I have to remember that my 6% growth isn’t guaranteed. Stocks can go down and. dividends can be cut. So I need to be prepared for it to take longer than seven years. At least I should be able to assume I won’t have to wait 30 years to achieve my goal.

It’s also good for me to remember that although step four is ongoing, I can get up and running with passive income investing in a relatively short period of time.

The post Passive income investing: my 4 steps to go from £0 to £500 a month appeared first on The Motley Fool UK.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2021