Here’s how I would invest £200 a month to achieve a passive income of over £7,100!

Buying stocks to earn passive income has worked for millions of people over the centuries.

It doesn’t always work: dividends are never guaranteed, so it’s important to choose carefully.

But by dedicating time and research to trying to buy large companies when their shares offer a good price and strong income prospects, I think you could aim to build substantial long-term passive income streams, even from relatively modest contributions.

If I had an extra £200 a month to invest in this plan, here’s how I would achieve an annual passive income of £7,100 over the long term.

Purchasing shares that generate unearned income

Fundamental to this plan is finding the right type of shares. I want to buy companies that I think can generate considerable excess income that I can use to fund dividends in the future.

While my focus is on yield, I also want to make sure I don’t pay too much for the shares, otherwise I risk ending up selling the shares at some point in the future for less than I paid for them, even if I received dividends along the way.

Even the best part can disappoint. So, I would diversify my portfolio across different companies.

A Stock to Consider Buying Now

As an example of the type of stock I think investors (including new ones) should consider buying to try and establish a long-term passive income stream, consider one I own: Diageo (LSE: DGE).

The company owns a number of premium beverage brands, from Johnny Walker to Smirnoff. The alcoholic drinks market is big and I hope it stays that way. Owning premium brands gives Diageo pricing power. This helps generate considerable free cash flows. This allowed it to increase the dividend annually for more than three decades.

Will this continue? Younger consumers are drinking less alcohol now than previous generations and Diageo has struggled to find a way to specifically address declining demand in Latin America.

But looking at the bigger picture, I’m optimistic about the long-term dividend prospects from owning the shares.

Dividends can increase!

At the moment, Diageo’s dividend yield is 3.1%. So for every £100 I invest today, I would expect to earn around £3.10 in dividends annually if the payout per share stays where it is now.

In the current market, I could aim for a higher average return – say 7% – while still staying in blue-chip stocks in proven companies.

If I invested £200 a month and reinvested dividends along the way (a very powerful move known as compounding), with an average yield of 7%, I would be earning over £7,100 in dividends after 20 years.

I would take the first step now!

This plan seems realistic, affordable and potentially very profitable to me.

Whether it’s £200 a month or so, my first move would be immediate, now. I would open a shares trading account or Stocks and Shares ISA and set up my regular monthly contributions.