While many people have to work for every pound that comes their way, not everyone does. Passive income is exactly what it sounds like: money that comes in without needing to work for it. UK dividend shares are among my favourite passive income ideas. They allow me to benefit from the work of leading businesses without needing to do any myself.
Here’s how I would plan to target monthly passive income of £250 by investing in UK dividend shares, in three simple steps.
1. Setting my saving target
While passive income doesn’t need me to work, it will require capital in this case. In order to invest in shares, I will need to have money. What if I am starting from nothing? In that case, setting up my passive income streams will take longer but it is still possible.
I would try to set a target for how much I want to save for my investment in UK dividend shares. If my goal is £50 in monthly passive income, that’s £600 a year. If I invest in UK dividend shares yielding an average 5%, I would need £12,000 to target that level of passive income. While it may take me a while to get to that amount, if I can put away £100 a week, I’d reach my savings target in little more than a couple of years. Saving less money, I could still reach my target, it would just take longer.
2. Investing in UK dividend shares
My next step to start generating at least some of my target £50 a month in passive income would be to choose shares in which I could invest. Even the best company can face unexpected challenges. So to reduce my risk, I would diversify my investment across different shares and business sectors.
Looking for passive income, my focus would be on dividend yield. That’s the annual payout on a share as a percentage of its current price. For example, currently, the National Grid share price is around £8.90. Last year, it paid around 49p per share in dividends. That means its dividend yield is about 5.5%. However, that depends on whether the company declares dividends in future – they are never guaranteed. That’s why, when considering UK dividend shares for passive income, I don’t just look at current yield. I also consider likely free cash flows and what sort of dividend they could cover. A company’s annual report is a good starting place to uncover such information.
I mentioned an average 5% yield in my example. Right now, as well as National Grid, a number of FTSE 100 companies offer such a yield, including British American Tobacco, Evraz, GlaxoSmithKline, Imperial Tobacco, M&G, Legal & General, Phoenix, and Vodafone. Each has its own risks so I would consider them carefully before investing.
3. Keep saving and enjoy the passive income
Next I’d keep up my regular saving habit, sit back and hopefully watch my passive income streams grow to £50 a month – and more.
If I buy a share today, I only pay once. But I am entitled to any dividends it declares until I sell it. So, for example, putting £100 a week into UK dividend shares today, if I don’t sell them I would hopefully be getting passive income for decades to come. All I need to do is take the first move, and start.
Christopher Ruane owns shares in British American Tobacco and Imperial Brands. The Motley Fool UK has recommended British American Tobacco, GlaxoSmithKline, Imperial Brands, and National Grid. 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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