Passive income is money that comes in without working for it. Sometimes it involves activities with very unpredictable returns, like setting up an online shop. I think it’s possible to try and have a smoother flow of regular passive income by investing in UK dividend shares. Here’s here I would use them to target £1,000 of income a month.
Why I like UK dividend shares as passive income ideas
The attractiveness of dividend shares to me when it comes to passive income is that they avoid a classic mistake many people make about earning without working. Most income comes either from someone’s labour or assets. So if I want to earn money without working for it, how much income can I really expect? With shares, often thousands of people are working to generate a company’s income. The good thing is that I don’t need to be one of them to benefit from it. I can simply buy the company’s shares and benefit from any dividends it pays.
So, if I invest in such shares, I can simply sit back and wait for dividends to roll in. They’re never guaranteed, though: even companies that have long paid a dividend can cancel or cut them, as Shell and many others did last year. So I would invest in a diversified portfolio of dividend shares to reduce my exposure to any one share.
Targeting £1,000 each month
So, how could dividend shares help me reach my monthly target of £1,000 in passive income?
That depends on their yield, or in other words, what percentage of their share price is paid out as dividends in a year. A monthly £1,000 adds up to £12,000 a year. So, if I could find some 10%-yielding shares, I’d be able to invest £120,000 to be in line for my target. But while there are some double-digit yielding shares I would consider, 10% is far above the average yield available on UK dividend shares.
More realistically I would target around 5%-6%, which would require around £200,000-£240,000 of capital to hit my passive income target. If I had that much, I could focus on my £1,000 monthly target. But if I had less – even much less – I could still apply the same principles to generate passive income. It’s just that I would aim for a lower monthly amount to come in.
Monthly versus sporadic passive income
Depending on how I wanted to use the £1,000, it might be helpful to have it coming in evenly each month – or it may be fine if it turns up now and again in lump sums.
It’s easiest to plan the second approach, as one needs to spend less time looking at dividend calendars and figuring out payment dates. But if I specifically wanted £1,000 each month, I could aim for that. I would need to invest in shares which typically pay out dividends in different months, holding enough of each to pay me £1,000 per month.
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Christopher Ruane 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.
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