£8,000 in savings? Here’s how I would aim to earn £2,300 a month in passive income

Dividends are the last form of passive income. That’s because other than researching the company you want to invest in and staying up-to-date on its activities, there’s very little you need to do.

If you trust the management of the company, there are no decisions to make. You can just sit back, relax, and get a profit that makes a profit.

However, the dividend yield is not very high. Average Footsie the company pays 3.6% per year on the value of its shares.

Therefore, unless you have a very large amount of money to start with, their contribution to your monthly income is likely to be small.

Long term passive income strategy

Even if they can be a source of income for you today, you can consider making a strategy to make them a meaningful source of income in the years to come.

Firstly, you could consider setting up a Stocks and Shares ISA. This allows you to invest up to £20,000 a year in shares without capital gains tax being applied to the gains made. This is a tax-efficient way to invest in shares.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Then it’s time to choose stocks to invest in. A passive income portfolio uses growth and dividends. This is because growth stocks will hopefully be realized quickly, increasing the value of the portfolio, while dividend stocks pay income.

It is important to consider that no profit or share price appreciation is guaranteed. However, a well-diversified portfolio with a good mix of these stocks can appreciate them annually by 5% (on average) and give a return yield of 5%.

If I invested £8,000 in such a portfolio and reinvested my earnings and contributed an extra £200 at the start of each month, I would be left with £555,453.76 over 30 years.

Using my 5% yield on that, I would be getting £27,772.69 a year in dividends, which is £2,314.39 a month.

One stock I like

British American cigars (LSE:BATS) is one UK share to consider in this portfolio.

The company’s shares have had a strong 2024 so far, down 13%. In addition, it paid a dividend of €8.9 per share last term and an annual yield of 8.9%.

There are serious concerns about its business model. For example, the number of smokers is decreasing, making it difficult to see the long-term future of tobacco products.

However, smoking is still a big market. We can see this as the company still managed to increase diluted earnings per share for the year in the first half of 2024 by 13.8%. The tobacco industry will eventually be shut down, but it will be decades before this happens. So, there is still an opportunity to use it.

Meanwhile, British American Tobacco is preparing for a smoke-free world, as smoke-free products now account for 17.9% of the company’s revenue. For example, it saw a 50% increase in the number of units of modern mouth bags sold.

Finally, its shares trade at a cheap price, with a forward earnings ratio (P/E) of just 7.4. So, if I had some spare cash, now would be a good time to grab some.