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Investing money in stocks is a way to earn passive income that millions of people use successfully.
I like the approach because it means I can benefit from the hard work of thousands of employees at companies with proven business models.
cutting my fabric
This can be a lucrative passive income idea and also tailored to one's own financial circumstances.
For example, if I had £8,000 left over, this is how I would use it to try to earn almost £6,000 of long-term annual income (the same approach could also work with much less money, but my passive income would be proportionately less in that case ).
Establish the right mindset
To start, I should explain some important ideas that I think are useful to keep in mind when taking this approach.
It's a long-term approach. This means that if I'm willing to wait for my passive income, I may get more each year in the future than if I started receiving it sooner.
Furthermore, my approach is to invest, not speculate. I'm not trying to get rich by investing money in hot stocks. Instead, my focus is on establishing long-term and hopefully lasting passive income streams based on owning small stakes in blue-chip companies with demonstrated cash-generating potential.
How Dividend stocks Can Generate Income
Many of these companies (although not all) tend to make more money per year than they need.
It can be used in several ways, including paying dividends. So while dividends are never guaranteed, some companies that often generate extra cash use it to fund dividends.
As an example, consider Diageo (LSE: DGE). The London-listed company is the force behind beverages Guinness to Baileys. It has a set of premium brands, a large customer base, and unique products that allow it to charge premium prices.
It may not be surprising, then, that Diageo is solidly profitable and regularly pays dividends. Not only that, but it has increased its dividend annually for more than three decades.
Can that continue?
There are risks to all stocks. A slowdown in sales in Latin America has hit Diageo's revenue lately and a weak global economy could see that extend.
Overall, though, I expect Diageo will try to continue increasing its dividend.
doing the math
But if you bought Diageo shares now, the yield would be 3%. That means for every £100 you contribute, you should earn £3 of passive income a year.
My goal would be to achieve my goal by owning a diversified range of higher-performing stocks, without sacrificing the quality of the businesses I invest in. If I could aim for an 8% return, for example, my £8,000 could earn me £640 next year.
Even better, if I compound (reinvest) the dividends, after 27 years I should be earning over £5,980 in passive income a year.
Starting
If you didn't want to wait so long, you could simply aim for a lower target.
Either way, my first step now would be to set up a shares trading account or stocks and Shares ISA.
