3 steps to earning £300 a month in passive income!

Generating passive income is a financial goal shared by many investors. After all, who wouldn’t want to receive money without having to do anything for it?

While there are plenty of ways to generate passive income, from my experience investing in stocks is often the simplest and most sustainable.

So, here are my three steps to generating a passive income worth £300 monthly.

1. Preparation

There are lots of ways we prepare ourselves for investment. Perhaps the first place to start is by taking care of any outstanding debts. Servicing debt is just throwing good money away, especially with today’s interest rates.

Once I’ve cleared debts, then I can start thinking about opening an investment account — a Stocks and Shares ISA is a great place to start as it’s tax-free — and considering my contributions.

Nowadays it’s possible to start an investment journey with as little as £20. Commission-free trading platforms and the invention of fractional shares have made this possible.

I think £3 a day, or £100 a month, is a good starting point. It’s the cost of a daily coffee, and it will add up significantly over time.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

2. Stock picking

Buying and selling shares could not be more simple these days. We can use platforms like Hargreaves Lansdown, or ones with small fixed fees, to take immediate investment action.

Picking the right stocks can be the challenge. When we’re investing for passive income, it makes sense to pick dividend stocks. These are companies that tend to be more established, as their income is stable enough to reward shareholders, and this tends to make them a less risky proposition than trying to invest in the next Apple, for example.

A common mistake is investing in stocks with the highest dividend yield. After all, we want to achieve the biggest return we can right?

Unfortunately, very high dividends are often unsustainable or even a warning. We need to look at metrics like the dividend coverage ratio, and performance guidance to assess whether the yield is sustainable. Just take a look at Persimmon‘s 20% yield last year — it was cut!

For reference, the average among UK shares is around 3.7%. Some stocks, like Phoenix Group, have a track record of returning big dividends, but don’t offer much in the way of share price gains. Sometimes, there’s a trade off.

3. When to take passive income

It’s not going to happen overnight, especially if I’m starting from scratch. After investing £100 a month for four years, I’d likely have around £6,000 using some pretty rough calculations based on a fairly modest rate of return and reinvesting returns until that point.

And with £6,000 invested in stocks paying a 5% yield — like Lloyds and Barclays — I’d take home £300 a month in passive income.

The post 3 steps to earning £300 a month in passive income! appeared first on The Motley Fool UK.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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More reading

How to start building passive income with £25 a week
With less than £1,000 in savings, here’s how I’d boost my monthly income… and ditch the credit cards
I’m listening to Warren Buffett and buying cheap growth stocks
I’d use July as a rare opportunity to lock in high yields!
“To date, the best-performing investment in my Stocks and Shares ISA is…”

James Fox has positions in Barclays Plc, Hargreaves Lansdown Plc, Lloyds Banking Group Plc, Phoenix Group Holdings Plc, and Persimmon Plc. The Motley Fool UK has recommended Apple, Barclays Plc, Hargreaves Lansdown Plc, and Lloyds Banking Group Plc. 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.

Generating passive income is a financial goal shared by many investors. After all, who wouldn’t want to receive money without having to do anything for it?

While there are plenty of ways to generate passive income, from my experience investing in stocks is often the simplest and most sustainable.

So, here are my three steps to generating a passive income worth £300 monthly.

1. Preparation

There are lots of ways we prepare ourselves for investment. Perhaps the first place to start is by taking care of any outstanding debts. Servicing debt is just throwing good money away, especially with today’s interest rates.

Once I’ve cleared debts, then I can start thinking about opening an investment account — a Stocks and Shares ISA is a great place to start as it’s tax-free — and considering my contributions.

Nowadays it’s possible to start an investment journey with as little as £20. Commission-free trading platforms and the invention of fractional shares have made this possible.

I think £3 a day, or £100 a month, is a good starting point. It’s the cost of a daily coffee, and it will add up significantly over time.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

2. Stock picking

Buying and selling shares could not be more simple these days. We can use platforms like Hargreaves Lansdown, or ones with small fixed fees, to take immediate investment action.

Picking the right stocks can be the challenge. When we’re investing for passive income, it makes sense to pick dividend stocks. These are companies that tend to be more established, as their income is stable enough to reward shareholders, and this tends to make them a less risky proposition than trying to invest in the next Apple, for example.

A common mistake is investing in stocks with the highest dividend yield. After all, we want to achieve the biggest return we can right?

Unfortunately, very high dividends are often unsustainable or even a warning. We need to look at metrics like the dividend coverage ratio, and performance guidance to assess whether the yield is sustainable. Just take a look at Persimmon‘s 20% yield last year — it was cut!

For reference, the average among UK shares is around 3.7%. Some stocks, like Phoenix Group, have a track record of returning big dividends, but don’t offer much in the way of share price gains. Sometimes, there’s a trade off.

3. When to take passive income

It’s not going to happen overnight, especially if I’m starting from scratch. After investing £100 a month for four years, I’d likely have around £6,000 using some pretty rough calculations based on a fairly modest rate of return and reinvesting returns until that point.

And with £6,000 invested in stocks paying a 5% yield — like Lloyds and Barclays — I’d take home £300 a month in passive income.

The post 3 steps to earning £300 a month in passive income! appeared first on The Motley Fool UK.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()

More reading

How to start building passive income with £25 a week
With less than £1,000 in savings, here’s how I’d boost my monthly income… and ditch the credit cards
I’m listening to Warren Buffett and buying cheap growth stocks
I’d use July as a rare opportunity to lock in high yields!
“To date, the best-performing investment in my Stocks and Shares ISA is…”

James Fox has positions in Barclays Plc, Hargreaves Lansdown Plc, Lloyds Banking Group Plc, Phoenix Group Holdings Plc, and Persimmon Plc. The Motley Fool UK has recommended Apple, Barclays Plc, Hargreaves Lansdown Plc, and Lloyds Banking Group Plc. 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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