When it comes to generating passive income from savings, the stock market has long been my preferred option. Honestly, I can’t think of anything more straightforward than simply getting paid for owning shares in companies that have already proven themselves to be strong, stable, and profitable businesses.
Let’s look at an example of how this might work with a lump sum of £20,000.
It’s about the dividends
Passive income from stocks comes in the form of dividends. These are paid out by a company every three or six months from its earnings.
Not all companies pay dividends. This can often be because management needs as much money as possible to increase sales. Even if dividends Are paid, this policy can be reduced or canceled at any time if something goes wrong.
For this reason, I think it’s important to really understand what the company does and where it’s going before looking at potential revenue streams.
Is the trade outlook positive or is the industry in decline? Does it actually have a competitive advantage over its competitors?
Here is a favorite
One stock that I already consider to be a passive income source is that of the comparison website operator MONEY (LSE: MONY). As owner of Moneysupermarket.comThe company receives a share when consumers conclude insurance, utility and credit card contracts through its platform.
This straightforward business model enabled FTSE250 Member to increase its dividends at a healthy pace since its IPO in 2007.
However, things have not always gone smoothly. During the pandemic, MONY kept payouts constant instead of increasing them. However, dividends were not canceled like so many others.
If the company can survive a global pandemic unscathed while rewarding its loyal shareholders, I am cautiously optimistic that it can withstand most future economic challenges.
Great yield
MONY currently has a dividend yield of 5.7%, which is pretty high for UK stocks, but not so high that I seriously doubt whether it will be paid out.
As a rough rule of thumb, if a dividend yield sounds too good to be true, it probably is. Anything over, say, 6% would definitely make me do more research. Are earnings collapsing for some reason? If so, the high yield could soon fall.
But I also wouldn’t rely on MONY for all of my passive income needs. It’s just one of several stocks I hold as part of a diversified portfolio.
This approach of safety in numbers should ease some of the pain I would feel if one or two of my holdings were to disappoint shareholders.
Patience required
So what else do I need to do? Not much, except reinvest the dividends I receive so that the compound interest effect can take effect.
If I invested my initial £20,000 at an average rate of return of 5.7%, this portfolio would be generating passive income of just over £500 per month after 30 years. I could get an even better result if I accumulated more savings over that period.
Patience is a must, but we Fools believe it is an essential part of any successful investment strategy.
If I had this nice savings pot today, I would start as soon as possible.
The post “Saved £20,000? Here’s how I plan to turn it into a passive income of £500 a month!” appeared first on The Motley Fool UK.
Further reading
Paul Summers owns shares in Mony Group Plc. The Motley Fool UK has recommended Mony Group Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
