If you’re like me, you might calculate your income and expenses on a monthly basis. It’s something I’ve always done to get a better feel for what’s coming and going with regards to my bank accounts. So with dividend income, I try and make a monthly tally of how much I received that month. FTSE 100 stocks usually pay out dividends a couple of times a year, but some pay additional ones via special dividends. This isn’t all on the same date, so if I owned a dozen FTSE 100 stocks all paying out dividend income, chances are I could get paid something each month.
Passive dividend income
In terms of putting effort in, I think dividend pay-outs are fairly passive. Initially, implementing the strategy may take some time, but once things are up and running, things run smoothly. To begin with, I’d pick an amount I can realistically look to invest into stocks. I’d then look at different companies that pay out income, and decide what dividend yield I’d like to aim for. We’d all like a yield of 20%+, but let’s be realistic! The FTSE 100 average yield is 2.90%, but you can increase this by targeting companies with a higher yield.
For example, investing in a mix of British American Tobacco, GlaxoSmithKline, and Rio Tinto would give me an average dividend yield of just above 6%. So there definitely is room to achieve a higher yield with established companies.
Once I’ve got an amount and a yield, I can invest. By spreading my money over various stocks, I create a regular stream of dividend income. As mentioned above, businesses pay out dividends at different times, so owning several stocks helps me to have monthly pay outs. It also helps to diversify my investment risk.
Generating four figures a month
Let’s dig into some specific numbers. What exactly is needed to make that £1,125 a month from FTSE 100 dividends? To get to this figure, I’d begin by investing £1,000 a month in stocks with an average yield of 6%. After one year, I’d have £12,000 invested, generating me £720 a year (£60 a month). If I keep up my regular investments (and assume I can access the same dividend yield in the future), I’ll get to the stage of making £1,125 a month in income by year 19.
This may sound like a long time, but it doesn’t tell the whole story. I’ve assumed that I’ll spend all my dividends during this period, and enjoy the money along the way. For example, in year 10, I’ll be making around £600 a month from the dividend pay outs. So it’s not like I’ve got to wait for decades to get any kind of monthly income. By the point of earning £1,125 a month, I would’ve already received a chunky total of £123,120 in income.
Alternatively, I could reinvest all of my dividends from the beginning. If I did this, I’d have a pot of over £405,000 by year 19. Then, I’d actually be receiving £2,025 a month in income, if I started to take it and not reinvest it. So for a retirement plan, this tweaked option could look very appealing.
Ultimately, dividend income from solid FTSE 100 stocks can really make a difference once you’ve crunched the numbers and know what you’re looking for.
