Do you currently have any practical plans for trying to earn hundreds of pounds in passive income every month? Some people do, but many don’t. The ideas of passive income can often seem quite esoteric, making the whole idea of earning money without working seem like a pie in the sky.
But in reality there are many such ideas Firmly Based on reality. One is to invest in companies that will hopefully pay dividends to their shareholders.
Here I explain how, by doing this with £20k today, one can aim for hundreds of pounds of passive income every month in the future.
When I say future, in this example I am assuming a time frame of 25 years before the income flows begin. It will be possible to achieve this soon – in fact, this year itself – but at a lower level.
why wait? The expectation is that the shares will pay dividends but rather than taking them directly as passive income, they can be reinvested. This is known as compounding and can be a powerful force multiplier when it comes to investing. Essentially, the dividend starts earning dividends in return. This is so they can fund the purchase of more shares.
This can all add up significantly over time. Compounding the £20k I mentioned above at a 7% annual rate for 25 years would grow more than five times, such a size that a 7% dividend would be equivalent to £633 of monthly dividends.
Is a 7% yield realistic? After all, that’s more than double the current yield FTSE 100 Index of blue-chip stocks. I think it’s realistic to still stick to high-quality stocks.
Of course, some shares may disappoint and no dividend is guaranteed to last, so it makes sense to spread the £20k across a diverse range of shares.
This could be in a Stocks and Shares ISA or other share-dealing account, but whatever investment platform is used, it is useful to keep an eye on costs as they can eat into returns.
I think investors should consider a stock for its long-term passive income potential at this time FTSE 250 broadcaster itv (LSE:ITV). It has a juicy 6.7% yield. It also aims to maintain its annual payout per share at least at its current level.
Still, with its well-known brand, strong broadcast footprint and extensive production business, why does the stock have such a high yield? Why does it still sell for pennies after a 38% price decline in five years?
It’s always worthwhile asking such questions, not only because they can be risks to the dividend, but also because even for an income-focused investor, capital loss can be painful.