Building passive income: how I’m aiming to generate £300 per month in dividends

James Reynolds discusses the plan he has to build a passive income portfolio that will pay him £300 per month.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Warren Buffett famously said, “If you don’t find a way to make money while you sleep, you’ll work till you die”. We all want passive income, and building it is one of the best ways to achieve that financial independence. There are many forms of passive income, like owning rental properties or a business. But dividend investing is my personal favourite. 

Dividends

Dividends are a portion of a company’s profits allocated to its shareholders. These payments can be made once, twice, or even four times a year and are often reflective of how profitable that company has been. Dividend investing is a strategy by which investors build a portfolio of reliable companies that regularly pay a stable dividend, which can then be re-invested into that portfolio. This strategy is very popular in the UK and in recent years we have seen record high dividend yields. Some even going to 13% or 15% of the share’s value!

Average yield

But these high rates are usually unsustainable over the long term. For example, the mining company EVRAZ paid 53p per share in 2019, a whopping 13.39% of the share price. But EVRAZ only paid 42p in 2017 and didn’t pay anything in 2016 or 2015.

The vast majority of UK companies pay a dividend of around 4%. This year, companies like BAE systems and Unilever are expected to allocate 4.22% and 3.39% respectively. It’s worth remembering that no company is under any obligation to increase, maintain, or even pay a dividend. Consistency is everything.

Capital needed

To reach my goal of £300 per month, I will need a total pot of £90,000. Four percent of £90,000 is £3,600. That, divided over 12 months is £300.

While I don’t have anywhere near that money on hand, if I save £250 per month, I would reach that magic number in about 30 years. 

Admittedly 30 years is a long time, but if I start investing that money right away, then the compounding interest will bring that date forwards faster. Now I just need to choose some companies.

Companies

While the goal is to aim for safe companies I can rely on, I do think it’s worth taking a few risks to help speed up the clock. I have spoken at length about how much I like Imperial Brands. The tobacco company has paid a sizeable dividend to its shareholders at least twice a year since 2002. The average yield today is actually 8.9%.

Since my plan uses 4% over 30 years as its benchmark, I’m not worried if Imperial Brands decides to cut down its dividend payment. However, I do think its important I don’t rely on this process and balance out the portfolio with smaller yield companies which I can depend on more consistently.

Lloyds Bank makes a dividend payment of around 2.6% which is beneath my target, but would balance out the risk. Finally, I would choose Unilever as the company is large, profitable, and currently pays a 3.39% dividend.

None of this is a guarantee for the future. Any one of these companies may eventually collapse for some unforeseen reason. All investing bears risks. But without risks one cannot achieve a reward. The important thing is to build a diverse portfolio so that, when retirement comes, I will have a passive income stream I can rely on.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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