My 4 steps to making £350 a month in passive income

Jon Smith explains the steps he’s taking to try and meet his passive income target via dividend stocks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Passive and Active: text from letters of the wooden alphabet on a green chalk board

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Passive income is a hugely desirable target for virtually any investor, me included. The concept of being able to park my money in a stock that pays me a regular dividend is a fairly simple one. And the benefits and rewards of doing so are just as relevant today as they were decades ago. Even though it sounds simple in theory, I need to make sure I follow a few key steps to give myself the best chance of meeting and maintaining my goal of £350 a month.

A lump sum or regular chunks?

The first step I need to take is to decide whether I want to invest a lump sum or invest on a regular basis. A large part of this will come down to how much cash I have ready to go right now. For example, if I want to make £350 a month in passive income and am targeting a 6% dividend yield, I’ll need to invest £70,000.

I don’t have this kind of money lying around, so I’ll be investing smaller chunks on a regular basis to build up to my target level of passive income. What this involves is setting aside a chunk of cash each month. If I put £500 a month in dividend shares with the same target yield, I’ll reach my goal in nine years.

This first step is key because it sets my expectations at a realistic level. Of course, it’s not set in stone, if I receive unexpected lumps of cash in years to come I can always speed up the process.

Picking the right stocks for passive income

The second step is to work out the stocks I want to invest in. This also ties in with my third step of figuring out what I want my average dividend yield to be. The perfect middle ground is to find dividend shares that have a solid track record of paying out income to investors. At the same time, if I can find a company like this that also offers me a high dividend yield, it ticks both boxes.

Usually, I have to compromise slightly on the yield in order to find a stable company. Earlier this year, the dividend yields of Polymetal International and Evraz were the highest in the FTSE 100 index by a long way. Yet these had to be cut due to problems with the situation in Russia. So these yields weren’t sustainable.

In terms of current dividend stocks that I’d buy, I like British American Tobacco, Taylor Wimpey and M&G. All three of these currently have a yield in excess of my 6% target.

Ongoing maintenance

The final step is to ensure that I keep investing over time to stick to my timeline. Investing each month means that I need to be active. So although the income received is passive, the whole process isn’t! In the years to come I might also have to rebalance my portfolio. If a stock cuts a dividend, I might need to sell it and put the cash in a rising stock. I know that my 6% isn’t guaranteed, of course. But overall, I think it’s worth the effort to be able to enjoy the benefits further down the line.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no positon in any share mentioned. The Motley Fool UK has recommended British American Tobacco. 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.

More on Investing Articles

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Nvidia shares hit a new high after record earnings. Is there a lot more to come?

Nvidia stock smashes expectations, as quarterly profit soars 600%. It's time for a 10-for-one stock split too, as it reaches…

Read more »

Abstract 3d arrows with rocket
Investing Articles

Scottish Mortgage shares rise following FY update! Time to buy?

Scottish Mortgage (LON:SMT) shares were closing in on 900p today after a positive full-year report from the giant FTSE 100…

Read more »

British Isles on nautical map
Investing For Beginners

It’s time! Here’s my FTSE 100 hit list for the general election

Jon Smith outlines the potential reaction for the FTSE 100 from the upcoming general election and the main stocks he's…

Read more »

Investing Articles

National Grid reveals £7bn rights issue and the share price plunges – should I invest now?

The National Grid share price has dropped almost 10% and a dividend cut is looming, but it may be a…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Nvidia stock is becoming more affordable!

Nvidia stock is up 2,500% over five years, but the chip giant’s share split -- announced during its earnings report…

Read more »

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »