Investing in Blue-Chip Companies for Passive Income
Buying into proven blue-chip companies is a time-tested strategy for generating passive income. This approach has been effective for centuries, and while no company can guarantee consistent dividend payouts, I believe that constructing a diversified portfolio of high-quality blue-chip shares can provide a reliable stream of income for years, if not decades.
The Power of Passive Income
Imagine having a spare £20,000 to invest. With this capital, my goal would be to achieve an average of £300 in passive income each month. This might sound ambitious, but with the right strategy and investments, it’s entirely feasible.
Doing the Maths
Calculating potential earnings from shares is relatively straightforward, though it’s essential to remember that past performance is not always indicative of future results. The key metric we use is dividend yield, which represents the annual dividend income as a percentage of the investment.
For instance, if I invest £20,000 in shares with a 7% yield—significantly above the FTSE 100 average—I would expect to earn £1,400 annually in dividends. This translates to roughly £116 per month. While this is a welcome addition to my income, it falls short of my £300 target.
A Watchout – and a Game Changer
The challenge lies in the fact that not all companies pay dividends, and among those that do, dividend policies can vary widely. Some companies maintain steady dividends for years, while others may cut them unexpectedly or increase them regularly. Therefore, selecting the right companies is crucial for the success of my passive income strategy.
To bridge the gap between my current dividend income and my target, I would employ a powerful investment technique known as compounding. By reinvesting my dividends to purchase additional shares, I can increase my passive income over time. If I stick to this strategy, I anticipate reaching my monthly £300 goal in about 14 years.
Finding the Right Shares at the Right Price
To build a diversified portfolio that achieves an average yield of 7%, I need to identify the right shares. One example of a company I would consider is Legal & General (LSE: LGEN), a financial services firm listed on the FTSE 100.
Legal & General operates in a sector poised for long-term growth, driven by high customer demand. The company benefits from several competitive advantages, including a strong brand, a large customer base, and extensive expertise in financial markets. Recently, it has also made strides to attract younger investors by highlighting the social responsibility of some of its investment options.
However, it’s important to acknowledge the risks involved. Legal & General did cut its dividend during the 2008 financial crisis, and a downturn in the economy could adversely affect its profits and, consequently, its dividend payouts.
Making the First Move
Despite the risks, I find Legal & General’s current 9% dividend yield appealing, suggesting that the share price reflects the associated risks. I view the current valuation as attractive and continue to hold these shares in my portfolio.
To kickstart my passive income plan, my first step would be to deposit the £20,000 into a share-dealing account or a Stocks and Shares ISA. This initial investment would set the foundation for my journey toward achieving a sustainable and growing stream of passive income.
By carefully selecting blue-chip companies and employing a disciplined investment strategy, I can work towards my financial goals while enjoying the benefits of passive income.