£20k in savings? Here’s how an investor can target £980 of passive income every month

Passive income ideas come in many shapes and sizes. What I like – and really use – is as simple as buying shares in blue-chip companies and collecting dividends.

That would be a huge advantage. It also means that, rather than trying to start a small business from scratch, I can benefit from the hard work and competitive advantages of just being successful. FTSE 100 businesses.

As an example, here’s how an investor willing to take a long-term approach can target close to £1,000 in monthly income by investing £20,000 in the stock market.

Readiness to invest

The first step would be to prepare the basis to start buying shares, even if those shares are yet to be determined.

There are a wide variety of different mutual accounts and Stocks and Shares ISAs available. Before putting £20k into one, I think it makes sense for an investor to decide what would seem best for their financial circumstances and investment objectives.

How to build long-term sources of income

In retrospect, the goal I am discussing here may seem impossible. £980 a month is £11,760 a year. For an investment of £20k, that would represent a dividend yield of close to 59%.

Even if there was an FTSE 100 share that yielded 59% (and it’s nowhere near), that alone would be a huge red flag for me. In addition, I will never put all my eggs in one basket to divide between several stocks.

But remember that I said I was discussing a long term come here. A long time can be a financial friend. Not only does it mean that a great company bought at an attractive price can hopefully prove its worth, it also allows time for profits to be reinvested – and, in turn, hopefully to generate more profits for themselves.

That simple but powerful technique, known as compounding, can be a huge power booster for the smart investor.

If an investor puts £20k into a share portfolio yielding an average of 9%, after 22 years of compounding that portfolio should be throwing away an income of over £980 a month, on average.

Finding stocks to buy

In fairness, 9% is not the average yield for an FTSE 100 share. That currently sits at 3.6%.

But that doesn’t mean 9% is unattainable. As an example, consider one share in my portfolio: Legal & General (LSE: LGEN). This FTSE 100 company paid a dividend of 9.3%. The management also set plans to increase the dividend per share every year.

It has done so since the recession due to the financial crisis, barring one year during the crisis when the payout per share was held down.

Due to its large target market, strong brand, large client base and proven ability to generate large amounts of cash that can support dividends, I feel confident that Legal & General can continue to grow its payout in the coming years.

Will it happen? The business has reported weak profits over the past few years and one risk I see is stock market turmoil leading policyholders to cash out, hurting profits.

However, I plan to hold the share and hopefully continue to earn passive income from it.