I find investing in shares can be a good way to set up passive income streams. Not all shares pay dividends – but many do. A lot of UK shares have seen their prices pushed down lately, meaning their dividend yields are now higher than they were before.
With that in mind, I think that by putting £1,000 a month into the right shares, I might be able to set up lifelong passive income streams that earn me £1,000 a month. Here is how.
Dividend yield
To estimate how much I might earn from a share in future by way of payouts, I look at its dividend yield. Take insurer Direct Line as an example. Its dividend yield at the moment is 11.6%. That means that if I invest £100 in Direct Line shares now, I would hopefully earn £11.60 in dividends each year in future until I sold them.
In this way, yield can be a helpful way for me to estimate how much income I might earn from a given share in my portfolio in future. But it is only an estimate, as dividends are never guaranteed. Direct Line might see profits fall due to the increased cost of second-hand cars and decide to cut its dividend. Then again, it may grow its business and increase the payout.
Aiming for £1,000 a month
So, what yield would I need to try and hit my target?
The answer is 10%. If I invested £1,000 each month for a decade, I would have put £120,000 into shares. At that point, if the shares are yielding 10%, I ought to earn £1,000 a month on average in dividend income. Once I owned the shares, I would be entitled to any dividends they paid until I sold them. So, even if I stopped investing any more money into my share-dealing account after 10 years, hopefully I could still benefit from passive income streams for the rest of my life.
I would want to diversify the portfolio to reduce my risk. I would be looking for an average yield of 10% — but as that is an average, each share I bought would not necessarily need to have such a high yield.
Finding UK shares to buy for income
But when shares have a yield of 10% like Rio Tinto, 11% like Direct Line, and Abrdn, or even the 19% offered by Jupiter and Persimmon, it can be a sign that the City is fearful they may cut their dividends. Jupiter has seen an outflow of client funds, while a housing market slowdown could hurt sales at Persimmon. Such events could lead to lower dividends.
So although I think a 10% average yield is achievable, I would never compromise on the quality of the shares I buy just to target a higher yield. I always seek to stuff my portfolio full with a diversified selection of UK shares in businesses I think have solid long-term profit prospects.