What is the best idea for passive income? Depending on who you ask, you may get many different answers. Personally, one of the ideas for passive income that I like (and employ) is investing in the stock market. In particular, this involves purchasing shares in proven, largest companies that, I hope, will bring me dividends.

Thanks to this, you can earn a lot or a little passive income. The investment may require a gigantic amount of cash or only a petite amount of it. In other words, it’s a adaptable approach that can be tailored to someone’s financial situation and passive income goals.

How stocks generate passive income

Not all shares pay dividends and can be redeemed at any time. Therefore, it is significant to understand how this approach works.

The amount an investor earns depends on how much he puts into the stock and at what average dividend rate. Yield is basically the amount of dividends they should earn in a year, expressed as a percentage of what they pay for the stock.

For example, a yield of 5% means that an investor investing £100 in the stock market should earn £5 in dividends per year.

Where does the money for the dividend come from? The company needs to generate enough free cash flow and then it can decide whether to pay a dividend or employ that cash for something else.

Therefore, when looking for stocks to buy, I look at the company’s business model and balance sheet. Then I try to estimate the probability of paying dividends in the coming years.

Targeting a specific income

I explained the dividend rate above. Let’s assume someone wants to make a passive income from dividends of £50 per day. That’s £18,250 a year.

To make things plain to explain, let’s imagine an efficiency of 10%. To achieve this target it would require investing £182,500 in the stock market.

However, I don’t consider 10% to be a realistic target for blue chip stocks in today’s market when FTSE100 gives 2.9%. However, I believe that the 6% target is credible. This would require investing approximately PLN 304,000 on the market. pounds. This can be done in one fell swoop (which is unlikely for most of us) or by making regular contributions – even petite ones – that accumulate over time.

With less money, the same plan could still work, but it would generate less passive income.

Income share to consider

A good start would be to set up a stocks and shares ISA or a shares trading account.

One part of income that investors should consider now is asset management M&G (LSE: MNG), with a dividend yield of 6.6%. The company aims to escalate its dividend per share every year (known as a progressive dividend policy) and has achieved this in recent years.

The demand for asset management is high and likely to remain in the long term. I believe that with its sturdy brand, international reach and multi-million customer base, M&G has solemn potential to generate continuous cash.

One risk is that volatile markets could prompt policyholders to withdraw their funds. In recent years, the company has sometimes faced the challenge of customers taking out more money than they put into its funds.

As a long-term investor, however, I am sanguine about M&G’s prospects.