One practical way millions of people earn passive income is by buying shares in blue-chip companies like Tesco and Apple.

If I wanted to start doing that from scratch today, with a target of earning an average £500 per month in income from company dividends, here is how I would go about it.

1. Start saving

My first move would be to set a regular savings target for how much spare money I wanted to put aside. This could be monthly, weekly or even daily

The right amount would depend on my own financial circumstances. The more I save to invest, the sooner I should be able to hit my passive income target – but I need to be realistic too.

2. Get ready to invest

I would want to make sure that I was ready to invest as soon as I had sufficient money and had identified some shares to buy.

To that end, I would look into different options and choose the right share-dealing account or Stocks and Shares ISA for my personal needs.

3. Learn about shares

A common mistake new investors (and many experienced ones, in fairness) make is investing in what they think is a great business just because it is a great business.

Why is that a mistake, one might ask?

A great business is at the heart of a rewarding investment normally. But it is not enough.

The price one pays is also important. Paying too much can mean that an investor loses money even though a company does very well. That is why I would get to grips with concepts of how to value shares before buying any.

I would also learn about the stock market more generally to try and avoid some common beginners’ mistakes.

4. Find shares to buy

What sort of shares would I look to own to try and hit my passive income target?

Obviously the higher the dividends paid by a share relative to its price, the better my passive income prospects might seem. But I do not invest in a company just because of its dividend. After all, such payouts are never guaranteed.

Instead, I look at the source of possible dividends: how much free cash flow a company looks set to generate in years to come.

I like to invest in businesses that have large customer bases and some competitive advantage that can help them make a profit. `

5. Aim for the target

If the company is good enough and priced attractively, then I consider its dividend yield.

With a target of £500 per month my annual goal would be £6,000 in dividends. If I invested in shares yielding 7%, for example, that would mean I needed around £86,000 in my portfolio to hit my target.

The good news is that I could build up to such a portfolio size over time. That might take years or decades depending on the size of my regular contributions. But I ought to earn dividends along the way, as I built up to my passive income target.

The post 5 steps to earn £500 in monthly passive income appeared first on The Motley Fool UK.

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More reading

• I’d invest a £20K Stocks and Shares ISA today to target £10K in dividends over 5 years
• No long-term savings? I’d use the Warren Buffett method to build wealth
• Buying 10,810 cheap Tesco shares would give me dividend income of £1,200 this year
• Scottish Mortgage holds Nvidia, Tesla and Amazon yet it’s still falling. Should I sell?
• How I’d invest £20k in a Stocks and Shares ISA to build long-term wealth

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.