How can I make £1,000 a month in passive income from stocks?

£1,000 per month in passive income from dividend-paying stocks is possible, but the sooner I start then the more realistic it becomes!

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Making £1,000 in passive income every month is an ambitious goal. But, I could get there with a Stocks and Shares ISA, regular investing in the right companies, and some luck.

I will need to invest regularly and use the power of compounding to build a portfolio of sufficient size to generate £12,000 a year in income. I don’t want to dip into my capital so, I will rely on dividend-paying stocks. It’s, of course, possible to sell shares each month equivalent to £1,000, but I prefer the dividend route.

An annual dividend yield of 4% is on the low end of what I consider reasonable, and 8% is on the high end. A £300k portfolio would generate £12,000 a year in dividends if it had a yield of 4%. A £150k portfolio with an 8% yield would generate £12,000 annually.

Dividend stocks

I would want a portfolio of multiple dividend-paying stocks with a suitable yield. The good news is that plenty of well-known stocks have five-year average dividend yields between 4% and 8%. Some examples are:

  • Aviva
  • Persimmon
  • Investec
  • Rio Tinto
  • SSE
  • GSK
  • Halfords

These stocks’ five-year average annual dividend yield ranges between a low of 6.3% for Halfords and a high of 7.91% for Aviva. All would be solid choices in a portfolio built to deliver £1,000 monthly in income. Of course, UK stocks tend to pay dividends twice a year, so it is more accurate to say equivalent to £1,000 monthly.

Building passive income

I won’t need to do much to receive income. But, it will take a lot of effort to set up a sufficiently sized portfolio to deliver it. I could use income stocks and reinvest the dividends, look at growth stocks, or buy an index tracker. Whatever I do, I need to invest some amount each month for years at a decent rate of return and let the power of compounding work its magic.

Let’s say I target a return of 6%. I can hit a portfolio value of about £165k by investing £250 per month for 25 years or £1,000 per month for 10 years. I could then look to get a portfolio yield of a little under 8% from dividend stocks and enjoy a passive income of more than £1k per month.

To get a portfolio closer to the £300k mark, I need to invest £500 per month at 6% for between 20 and 25 years, or £750 for between 15 and 20 years. A larger portfolio won’t require as high a dividend yield to hit my £1,000 per month target.

Starting early

If I invest enough every month into dividend-paying stocks with decent yields, reinvest the dividends, and do this over multiple years — perhaps decades — I can build a substantial portfolio. When the time comes, I can take the dividends instead of reinvesting them. If the portfolio is big enough and the yield is high enough, I could hit £1,000 monthly in passive income one day. The earlier I start, the better my chances.

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.

James McCombie has positions in GSK plc, Rio Tinto, and SSE. The Motley Fool UK has recommended GSK plc. 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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