I spend a lot of time looking into the future when thinking about making passive income from shares. I often think about how much I’d need to make over a period of time in order to generate X pounds in my account.
This is the way most people look at it, but I wanted to flip it and think about it by looking backwards. For example, BP (LSE:BP) shares have paid out some form of dividend for many years. So let’s see how much income I could have made over the past few years.
Looking back at passive income
Firstly, let me run through a little about BP as a company. It’s a well known oil and gas company that’s involved in all of the different stages of production. As such, it owns oil fields and has exploration efforts. At the same time, you can find a BP fuel garage in a location not too far from your current location.
BP has been a favoured stock to buy to make passive income from shares for a long time. One of the reasons for this is that the oil and gas industry is mature. It’s dominated by a handful of large companies that share out the majority of the market. As such, it’s unlikely (but not impossible) that BP would want to retain all profit to reinvest into growth projects. The company sees better value in paying out some profit to shareholders as a dividend.
Let’s say I’d invested £1,000 into BP shares five years ago. The dividend yield at that time was 8%, using the nearest dividend payout of 24 March 2016 of 7p per share. It’s difficult for me today to track the dividend yield perfectly, but I can get a good idea as I would have locked in the share price when I initially bought the stock.
As it happens, six months later the dividend increased 7% to 7.55p per share. So my dividend yield at that point would have been 8.56%.
If I take a measure of the yield every six months this gives me 10 yields over the five-year period. According to my calculations, the average yield over this period was 8.06%.
If I’d reinvested my dividends, that would give me a total value of £1,473.41. The passive income from the shares alone would amount to £403, but the benefit of reinvesting these dividends and compounding it gives me the additional £70.41.
What does looking back tell me?
A good point this shows me is that it’s much easier to look forward than to look backward! The maths is a lot easier to project how much I could make from passive income from shares than to look at historic numbers. But projections might not always be correct. For example, the BP dividend payment last September was halved, to 4p. If I was trying to forecast this, I probably would have got it wrong.
Looking back also shows me how quickly passive income can start to stack up over time. By locking in the share price when I buy a stock, I can then accumulate income. If I was sitting on the £1,000 worth of BP shares, I’d be looking forward to the next five years based on the above!
