£9,000 in savings? Here’s my three-step approach to achieving £1,794 in passive income.

By investing some spare savings in dividend-paying stocks, we can create passive income streams that can help put some of the profits of leading companies into our own pockets.

If I had some spare cash today – say £9,000 – here are three steps I’d take to get the ball rolling and reach my long-term goal of £1,794 in passive income each year with this approach.

Step 1: Turning Savings into Investment Capital

My first step would be to open a shares trading account or Stocks and Shares ISA and then put £9k into it.

That way, once I find a stock to buy, I’m ready to take action.

I say shares because as much as I like one investment opportunity, I would spread £9k across a number of shares to reduce the risk if one of them performs poorly. This happens.

Step 2: Selecting Stocks to Buy

I then began the process of finding stocks for my portfolio.

With thousands of companies listed on the UK and US markets alone, deciding where to start can seem daunting.

My approach is to stick to areas of business that I understand and that I believe have the potential for long-term profit. I would then focus on companies with proven business models and competitive advantages that I believe could help them continue to generate excess cash to fund dividends for years or even decades to come.

Share of income to consider

As an example, I think passive income investors should consider buying one stock: ITV (LFB: ITV).

FCS index 250 The broadcaster has a legacy business that continues to generate revenue through advertising. Over time, this figure may decline, and the costs of ramping up digital operations may eat into profits.

But for now, the business continues to generate significant cash surpluses and the company is also building out its digital offering.

Apart from this part of the business, the other half of ITV is the studios and production business. This helps protect it from the ups and downs of advertising demand, since it can make money by renting out its space and services to a wide range of program creators.

Currently, at the ITV share price in pence, the dividend yield is 6.8%.

Step 3: Grow Passive Income Streams

Imagine I invested £9k with an average return close to this, 7%. Although about twice as much FCS index 100 On average, in the current market, I think this is achievable.

So 7% of £9,000 is £630 per year. I think this is quite reasonable for starting passive income.

But I could try to do better – many better by taking a long-term approach. This happens through one simple step known as compounding. This simply means that I use the dividends I earn to buy more shares.

Imagine that I increased my dividends for 15 years at an average annual rate of 7%. In 15 years I should be earning approx. £1,794 passive income every year.