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How to make a passive income with just £300 a month in 2023

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The stock market can be an excellent source of passive income. By capitalising on cheap, high-yield dividend stocks, investors can build chunky amounts of wealth, even with modest amounts of capital.

In fact, with just £300 a month, it’s possible to establish a six-figure portfolio, generating a second income of £21,000. Here’s how.

Building wealth in the stock market

The London Stock Exchange may not be filled with the latest ground-breaking tech stocks, but it’s home to lucrative income opportunities. Of the 100 companies in the FTSE 100, 95 currently pay dividends. And 24 offer a yield of more than 5%.

As a whole, the index currently offers an average yield of 3.7%. But by being selective and picking individual stocks, achieving an average yield of 5% is entirely possible without needing to take on excessive risk.

At this rate of return, an investor seeking to generate £21,000 each year, or £1,750 a month in passive income, would need a portfolio worth roughly £412,500.

Obviously, that’s not pocket change. But through compounding, investing just £300 a month, which roughly translates to £70 a week, it’s possible to establish this chunky nest egg in the long run.

Since its inception, the FTSE 100 has delivered a total shareholder return of around 7.6% a year. And by tapping into a low-cost index fund, investors could theoretically hit the six-figure threshold within just 30 years. At this point, they can transfer their capital from an index fund into individual stocks to achieve their target income stream.

Passive income from stocks has risks

While the maths can paint a rough timeline of the wealth-building process, investors may have to wait far longer, in practice. That’s because there’s no guarantee the UK’s flagship index will continue to deliver the same returns moving forward. And even if it does, a single badly-timed stock market crash, or correction, can undo years’ worth of work.

But even if the FTSE 100 behaves as expected, a new risk is introduced when picking individual stocks. Investors can’t just buy the highest-yielding enterprises they can find. In fact, this approach would likely destroy wealth rather than create it.

Why? Because a high yield is usually a sign of weakness rather than strength. And some of the largest yields on the London Stock Exchange are caused by rapid share price declines rather than sudden surges in earnings.

Of course, this risk can be managed. Diversification is just one method that helps mitigate the impact of any single company failing to keep up with shareholder payouts. And by carefully investigating and analysing businesses, it’s possible to filter out the duds and establish a portfolio of reliable dividend stocks set to generate a chunky passive income for decades to come.

The post How to make a passive income with just £300 a month in 2023 appeared first on The Motley Fool UK.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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More reading

  • Here’s one value stock I’d snap up today!
  • Is Rolls-Royce’s share price too cheap to miss? Here’s what the charts say!
  • 2 superb FTSE 100 stocks to buy before the next bull market!
  • 4 FTSE 250 value stocks I’d buy without delay!
  • Is Lloyds’ share price too cheap to ignore? Here’s what the charts say!

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.