Passive income is something that few of us can turn down. The opportunity to make money without lifting a finger is incredibly appealing. There are various different ways that I can go about this. Some of the most popular ways include bonds, buy-to-let property and dividend shares. Personally, I think dividend shares offer me the best overall risk/reward. Here’s why.
Dividend share pointers
Dividend shares don’t have a minimum investment size. This doesn’t actually just apply to dividend shares, but rather shares in general. I can contrast this to property, in which I’d need to have a minimum of a four-figure sum ready to go in order to place a deposit. In most cases, it would stretch into five-figures. Bonds usually also have a minimum ticket size of £1,000.
Therefore in terms of getting myself going and getting passive income flowing, dividend shares appeal to me the most.
Another point in this regard is the actual yield I can achieve. The bond markets tend to track the base rate if I want to buy Government issues. Corporate debt can get me a higher yield, but also carries higher risk. Comparably, the most attractive risk/reward comes from dividend shares in my opinion. I can find a selection of stocks with a yield in excess of 5% at the moment.
Getting to £1,000 a month
Once I’m happy that I’m looking in the right place, I can start to add some numbers into the mix. If I want to make £1,000 a month from dividend shares, how can I make it happen?
The answer depends on how much money I can afford to invest right now. For example, if I invested in a mix of FTSE 100 stocks with a yield of 5%, I’d need to stump up £240,000 in one go. Not many of us have that kind of liquidity ready to go!
As a more viable alternative, I’d consider investing a smaller amount each month. For example, £1,000. Any dividends that I get during this period I’ll reinvest it back into my shares. This will reduce my passive income in the short run but will speed up the time needed to reach £1,000 per month.
Using these figures, it would take me around 14 years to reach my goal. At this point, my investment pot would be larger enough to generate me £1,000 a month. It might seem like a long time, but this building up of dividend shares can’t be done overnight unless I have significant capital to play with.
Rather, I’d look to start right away so that I can at least get the ball rolling. This can then complement my more active stock picks.