Dividend income refers to money that I get paid as a shareholder of a business. A FTSE-listed company usually pays out dividends semi-annually, so I could expect to see cash into my account a couple of times a year. If I want to achieve a certain level of income per year, I need to shift my focus away from one company and look more towards a portfolio of dividend shares.
Assessing how much I need to invest
The main thing I need to consider when aiming to make £5,000 a year is how much cash I have available at the moment. Clearly, if I can only afford to invest £1,000 right now, I’m not going to be able to make £5,000 a year in dividend income. The math simply can’t add up.
To start building the components together, I need to first look at what dividend yield I can achieve. This will impact how much cash I need to invest. For example, with an average dividend yield of 1%, I would need to invest £500,000. But with a yield of 10%, this reduces my initial investment down to £50,000.
So what yield can I realistically get? If I wanted to stick to the average yield within the FTSE 100 index, I could achieve a yield of 3.39% right now. Assuming that I pick my dividend stocks actively, I think I could boost this yield to 5%.
On that basis, I’d need to invest a lump sum of £100,000 in order to generate £5,000 a year in dividend income.
An alternative method for dividend income
If I have the needed cash available, then I can move forward to selecting a group of dividend stocks to put my funds into. However, there is another way to reach the £5,000 goal over time.
Rather than invest a lump sum, I can invest a smaller amount each month. For example, let’s say I want to start enjoying the £5,000 dividend income in 10 years time. This gives me a decade to invest in order to get a pot worth £100,000.
In this case, I’d need to invest just under £650 a month for the next decade. Any dividends I receive during this period from the stock I invest in would be reinvested back into the pot. This would have the same target yield of 5%. Then at the end of 10 years, I’d have a dividend portfolio worth over £100,000. From then on, I could start to enjoy it.
The £5,000 is just a figure, and the same process can be carried out for a higher or lower amount. The main thing to look at is what yield do I feel comfortable with and how much can I afford to invest. This can be either in one go or over time. From this angle, I should be able to work towards my goal of passive dividend income.
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