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Making money without working for it is appealing for obvious reasons, but I find that many passive income ideas seem overly complicated.
Instead, my strategy for making that money is to invest in blue-chip stocks that I expect will pay me dividends in the future. With that, I hope to be able to generate significant income streams without having to do too much.
To reach £203 per month in passive income using that approach, here's what I would do.
1. Have a stock trading account ready to go
I would put my £9,000 into an account that allows me to buy and sell shares.
If I didn't have one, I would open a share trading account or a stocks and shares ISA. There are lots of different options available so I would choose the one I felt was most appropriate for my circumstances.
2. Choose how to invest
My next step would be to establish an investment strategy.
It may sound simple: I want passive income, so I would focus on income stocks rather than growth stocks.
However, income shares come in all shapes and sizes. Just because a company has paid a large dividend in the past is no guarantee that it will continue to do so. An example is Vodafone. He FTSE 100 Index The telecom giant has a double-digit percentage yield, but has announced plans to cut it in half.
To reduce the potential impact of such moves on my passive income, I would diversify my £9,000 into five to ten different stocks.
However, picking the best possible stocks would help me. So I would make a list of stocks in areas that I think offer the right mix of passive income potential, risk, and value.
3. Find stocks to buy
By doing that, you would start buying stocks.
As an example, let's consider one from which I already earn passive income: M&G (LSE: MNG).
The asset manager operates in an area that I expect will benefit from high and resilient demand over the long term, but so do many other firms.
Fortunately, I think M&G has some attributes that can help it differentiate itself from its rivals, from a strong brand and a large customer base to long experience in financial markets.
From an earnings perspective, its 9.3% dividend yield is attractive. The company also aims to maintain or increase payout per share each year, although having a target doesn't necessarily guarantee that it will be met.
There are risks. A financial crisis could lead to investors pulling out their funds, which would hurt returns. Still, as a long-term investor, I am happy to hold M&G.
Aiming at my target
M&G is a high-yield stock. Even targeting a lower average yield of 7% would comfortably outperform the FTSE 100 average, although in the current market I think this is realistic, provided quality businesses are maintained.
If I did that, I would be making £630 a year. But if I reinvested the dividends, increasing my portfolio's value by an average of 7% a year, after 20 years I would hopefully be earning more than a couple of hundred pounds a month in passive income.
