Here’s how a £500 passive income plan could help me retire early

Here’s how I’m looking to supercharge my simple £500-a-month passive income strategy to earn £1,000 a 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.

Passive income text with pin graph chart on business table

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The average retirement age in the UK is 64.5 years and it’s set to rise. And while financial freedom, early retirement and leaving behind the nine-to-five grind are the dreams of many, very few achieve this. However, more people like me are waking up to the power of creating passive income streams. And as a young investor, I have been actively researching investment routes that help create a passive income portfolio to slowly build wealth.

With an aim of retiring by my late 50s, I think I have created a template that could give me that extra decade of retirement time to enjoy. And all it takes is a few hours a month of planning and investing. 

#1 Reinvesting dividends

I have set aside £10,000 to kickstart my passive income portfolio. And with this, I am looking at DRIP (Dividend Reinvestment Plan) as the primary way to keep my passive income portfolio growing in line with expected inflation. 

The DRIP strategy uses the power of compounding. This simple tool is used by investors like Warren Buffett, whose company made $3.8bn in dividends alone in 2018. For the next 20 years, I will reinvest every dividend payout back into my initial investment. And this could increase my payout figures by over two times by the time I am 50. 

Let us assume I pick a stock from the dividend-rich FTSE 100. Companies like M&G and Rio Tinto are dividend aristocrats that offer 8%+ yields and have raised payouts steadily over decades. And I think they could, if current projections are maintained, offer a steady 5% annual yield on average.

Assuming 0% share price and dividend growth over the 20-year period, my investment would be worth £20,000 without DRIP. A £10,000 income from dividends sounds awesome, but it could be so much better.

With DRIP, the same investment would be worth £26,532.98. And the most impressive fact is that my dividend payout after the 20 years would be £1,263.48 received every year. This is over two times the £500 I would receive every year without DRIP. 

#2 Systematic investments

I am also looking to invest an extra £500 a month into this pot, amounting to £6,000 a year, for 20 years. This would take my total investment to £130,000.

And with DRIP investing and systematic payments every year, the final amount would become a whopping £224,928.70 with a payout of £10,425.18 that I will receive every year. I think I could easily receive £1,000 a month with some share price or dividend growth over 20 years. Not a shabby foundation for a passive income play, right?

However, it is important to note that dividend payouts will fluctuate. Dividends can be scrapped when a company (or the economy) struggles. I could actually lose money. Just picking companies with cash reserves or large market shares will not be enough. Being diligent and monitoring my investments periodically is crucial.

Also, putting all my eggs in one basket is unwise. I will continue investing in growth stocks from sectors I see as fairly future-proof to diversify. But I think these two guidelines are a great starting point for me to target a £1,000-a-month passive income stream.

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 assessed. Consider taking independent financial advice.

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »