I’m investing £250 a month to aim for £5,000 in passive income. Here’s how!

Jon Smith sets his sights on enjoying passive income for the future and explains what he needs to do now to get there.

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.

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.

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I’m one of those people that likes to have a monetary goal. Having a clearly defined financial target gives me something to work towards every day. One specific goal I have is to try and reach a certain level of passive income from dividend stocks. By regularly investing each month, here’s why I’m confident I can reach £5,000 in annual dividend income.

Chipping away at the target

I’ve set my monthly investment amount at £250. I feel that this is the right ballpark figure that I can commit to each month. I’m not saying that I’ll never tweak this amount, but it’s the right starting point. I prefer to do this monthly instead of investing a chunk in one go as it’s easier on my finances.

The other benefit of monthly investment is that I can take advantage of the volatile stock market. I’m a firm believer that over many years, it’s impossible to perfectly time the market. Trying to exactly pick the time to buy and sell is very hard.

Instead, by putting money in the market at regular intervals, I can take away the stress. If the stock market is falling, I can invest at lower prices. Even if the market is rallying, I’ll benefit by already having some exposure from the previous month, instead of still being fully sat in cash.

For my passive income goals, lower prices means higher dividend yields. In turn, a higher yield will boost the amount of income I get paid. I can then reinvest this money straight away, allowing it to compound the value of future dividends.

Running the numbers

In terms of the specifics, it would take me just over 12 years to reach £5,000 of annual passive income. This would involve me investing £250 each month in top dividend stocks. My average yield would need to be 8%. This is much higher than the current FTSE 100 or FTSE 250 average, but I think it’s possible. There are 14 stocks that fit this description. Even by discounting some for company specific reasons, I can build a sufficiently diversified portfolio.

Any dividends I receive will be reinvested back to my portfolio. This will help to speed up the process of reaching my goal.

Passive income risks

No dividend income is guaranteed. I can own a stock that appears to be doing well now. But in years to come, the dividend may be cut. I’ll therefore need to be careful in monitoring my portfolio and making any needed changes.

Further, I accept that 12 years is a long time to wait. Along the way, I might find more lucrative investment ideas that suck up my cash instead. Or I might find that I simply can’t keep up with the monthly requirements.

Despite the above, I think that future me will be thankful that I set this goal. Once I reach it, making £5,000 a year in passive income is certainly something I’ll appreciate.

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.

Jon Smith and The Motley Fool UK have no position in any share mentioned. 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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