Passive income can sound like an appealing idea – but just how realistic is it to try and put a passive income plan into action?

That depends on what it is. One common way millions of people worldwide already earn passive income is through owning shares in well-known companies that pay dividends to their shareholders.

Such an approach does not require any work on the part of those shareholders. It is also flexible, as someone can invest as much or as little as they choose.

3 key variables to understand

The basics here are, well, pretty basic. As with all investing, when it comes to passive income, I try to stick to businesses I feel I can understand.

I spread my money over different shares so that if one disappoints me (for example by cancelling its dividend, which can always happen) then the overall impact on my passive income streams is limited.

How much income such an approach can earn depends on three key variables: how much is invested, at what yield, and for how long.

Time can help, for example if someone initially reinvests (compounds) dividends and only later starts using them as passive income.

To illustrate, imagine that someone invests £20k at a 6% compound annual growth rate. Here is what that could mean when they decide to start using their portfolio for income (presuming a 6% dividend yield):

As you can see, time rewards the patient investor. But while waiting 50 years for passive income might suit a 20 year-old forward planner eyeing their pension income, many people will want to start earning the passive income sooner.

In this example, after 30 years, that one-off £20k investment today would generate £6,892 a year in dividends – equivalent to around £574 a month.

Aiming for a 6% goal

Six percent is double the current FTSE 100 dividend yield. But I see it as a realistic goal while sticking to proven blue-chip shares.

In the initial phase of compounding, the 6% goal can also be helped by share price growth (though share price falls could eat into it). Another factor that can eat into returns is stockbroking charges, so choosing the right Stocks and Shares ISA is a smart move.

One share I think investors should consider is FTSE 100 financial services firm Standard Life (LSE: SDLF). The long-established business counts one in five UK adults as a client. I expect demand for pensions and retirement savings products to prove resilient over the long term.

Standard Life has proven its business model can generate substantial excess cash, supporting a juicy dividend. Currently the yield is 6.4%. The firm has grown its dividend per share annually in recent years and aims to keep doing so.

No dividend is guaranteed though, and with some £300bn of assets under management, the company faces risks. For example, a weak property market could force it to write down some its mortgage book, hurting earnings.

Over the long run though, I think the firm’s prospects look strong.

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Christopher Ruane does not hold any positions in the companies mentioned.