That is an approach a lot of people take. The thinking is quite simple: many shares use some or all of a business’s spare cash to pay dividends, so by investing in them someone can enjoy some of that return.

Here is how much such an approach could earn.

Choosing high-quality shares

The projected earnings depend on something known as dividend yield. Yield is basically the amount of dividends earned in a year, expressed as a percentage of what the shares cost to buy.

One thing that is important to understand is that a dividend is never guaranteed. So when we are told a share has a 5% yield, for example, there is no guarantee it will keep paying £5 for each £100 invested. That will depend on how the business does and whether the board of directors prioritises dividend payments.

That uncertainty also helps explain why rather than plump for one share, it makes sense to choose a diversified portfolio, always looking for high-quality businesses with attractive share prices.

The UK stock market’s 100 most valuable listed companies constitute the FTSE 100 Index. Right now, it yields 3.1% so £20k invested in it (for example through a tracker fund) should generate annual passive income of around £620.

A 5% yield would mean £1,000 a year of passive income. That is already possible and, in fact, some shares yield well above 5%, so a higher income is possible too. Though it is worth remembering that when a share has an unusually high yield it can sometimes indicate the City perceives it to carry elevated risks.

From idea to income

How could someone go about putting such a plan into action? A useful first move would be deciding how to buy and hold shares. That might be a share-dealing account, Stocks and Shares ISA, Self-Invested Personal Pension (SIPP) or trading app.

There are lots of different options. So it is important to take time when choosing one, as they the have different pros and cons.

One share to consider

Having done that, the next step would be to start investing the £20k. One share that I bought recently offers an attractive dividend yield of 4.5%.

I am also hopeful it may generate capital gains for me in coming years if the share price rises, following a 28% fall over the past five years.

The share is Reckitt Benckiser (LSE: RKT), the FTSE 100 maker of consumer goods such as Vanish and Dettol. Its share price fall reflects risks that could still hinder performance, such as litigation costs associated with historical product liability claims.

Still, while the share price may fall further, I invested because I believe it could well go up in the coming years, Meanwhile there is an attractive dividend on offer.

With its premium brand portfolio, proven cash generation capabilities, and global presence in household product categories that benefit from resilient consumer demand, I see a lot to like here.

Should you invest £5,000 in BLCKMRKT right now?

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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BLCKMRKT made the list?

Christopher Ruane owns shares in Reckitt Benckiser.

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