How I’d invest £200 a month to target a £1,000 passive income

The stock market can be a great source of passive income. It is home to thousands of dividend stocks that pay regular dividends to their shareholders.

But before I start thinking about withdrawing dividends, I need to grow enough savings.

Let’s look at this a little more.

Fast passive income maths

Investing in stocks is often considered a long-term activity. Right, in my opinion. But while I have stocks that I want to hold for years, I also want to make additional passive income faster.

Remember that this is not a get-rich-quick thing. It will still take five years to prepare. For example, let’s say I invest £200 a month for five years.

My goal is to earn an extra £1,000 a year next year, with as little time and effort as possible. It doesn’t change your life, but it can definitely contribute to your next vacation.

And if I want to target a bigger amount, I can just raise my investment every month.

So, to get this bonus income, I calculated that I would need to make a pot worth around £14,300.

And in order to reach this number, I know that my stock must earn 7% per year. As it happens, around average stock market returns.

Dividend share

Finding the highest dividend stock picks will be your next task. When I built the pot in the early years, I wouldn’t take dividends. However, by reinvesting and buying new shares, I can benefit from the magic of compounding.

This should help my pot grow faster.

Once I reach my target portfolio size, I am ready to start withdrawing passive income in the form of dividends.

And since I’ve been investing in dividend stocks since the beginning, I don’t need to change my choices.

Quality stock

When looking for the best dividend stocks, the FTSE 100 that’s a great place to start. This is home to some high yielding stocks.

But I must remember that a larger than average dividend yield may not be sustainable. Therefore, it is important that investors look for other characteristics such as a history of consistent dividend payments, a solid balance sheet and substantial income.

I will also look for companies that operate a stable business model with a strong competitive advantage. These may be less likely to be disrupted and may provide more stable earnings and dividends in the future.

Finally, I consider it important to diversify and spread my choices across several industries. This should prevent me from putting all my eggs in one basket.

Stock options

Now, if I had a spare £200 a month to invest in this passive income plan, I would buy it Taylor Wimpey, Legal & General, Rio Tinto, The Phoenix Groupand BP.

On average, this option currently yields a 7% dividend. All of them have great payout histories and their dividends are covered by earnings.

Finally, they spread across different sectors. Just what I was looking for.