How I’d invest £200 a month to target a rising passive income

If I want to protect my standard of living when I retire, I’ll probably need a rising passive income. Without income growth, my spending power will fall every year. Events this year have shown us just what a serious problem that can be.

Today, I want to explain how I’m using dividend shares to target reliable long-term income growth.

My dividend growth plan

When UK investors look for income, they often focus on the FTSE 100. There are certainly plenty of high-yield dividend stocks in the lead index. Unfortunately, some of them have a growth problem.

Take Vodafone, for example. The telecoms giant offers an attractive 6.8% dividend yield, but this payout has been unchanged since 2019 and is expected to stay flat again this year.

With inflation high, a few years of flat dividends could really devalue the passive income from Vodafone shares.

My aim is to build a portfolio of stocks that I can hold for many years, benefiting from long-term dividend growth. For this reason, I tend to buy shares with lower dividend yields, but higher growth rates. Over time, this should mean my investments provide a growing stream of income.

However, it’s important to remember that individual dividends are never guaranteed and can always be cut. That’s why it’s important to have a diversified portfolio and not rely too heavily on just one or two stocks for income.

What I’m buying

Many of the stocks in my portfolio are FTSE 250 shares. Companies in the mid-cap index are not as large as those in the FTSE 100 but quite often have stronger growth rates.

Among the FTSE 250 companies I’ve been buying recently are homewares retailer Dunelm and shipping services group Clarkson. Both have excellent long-term records of dividend growth, in my view.

Elsewhere, I like financial trading firm IG Group. This market leading CFD provider is very profitable and tends to benefit from uncertain market conditions, when clients trade more.

A few of the other companies on my radar are IT supplier Computacenter, instrumentation specialist Spectris, and real estate agent Savills.

All of these companies could face a temporary slowdown during a recession, in my view. But they’re all successful businesses with long track records of steady growth. The kind of shares I want to own.

How I’d use £200 per month

My aim is to have a passive income portfolio of around 20 shares. Building a portfolio this size from scratch takes time, but I think it’s manageable if I can invest £200 per month.

As a rule of thumb, the minimum I’ll spend on shares is £500. This limit is to make sure dealing charges don’t eat up too much of my cash.

For my passive income portfolio, I’d probably plan to buy a new stock every three months, with £600 each time. Another advantage of this approach is that it would allow me to buy gradually, taking advantage of any market dips.

Over time, I think this strategy should allow me to build a portfolio of good quality dividend growth stocks, producing a reliable income.