Can dividend shares earn me £1,000 a month in passive income?

Dividend shares could be the key to generating regular income from my portfolio. I’m looking at how I’ll go about picking the right ones.

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The vast majority of the FTSE 100 companies have paid some sort of dividend to shareholders in the last year. At the time of writing, just six of the FTSE 100 have a dividend yield of 0%. But for my portfolio, I’m looking to ensure I pick out the dividend shares that can help me reach £1,000 per month in passive income.

Reliability

Since I’m a long-term investor, a dependability in receiving dividends regularly is important to me. I think targeting historically reliable dividend payers could work best for my portfolio.

My logic here is that if I invest in a company that pays out in both good times and bad, then I’m more likely to hit my monthly £1,000 target. I want to know that my payments are coming in whether we’re mid-recession, or in the middle of an economic boom.

Looking into companies who continued to pay out during periods of uncertainty (such as the Covid-19 pandemic) has been my starting point.

I’ve also looked into companies who have held or grown dividends every year for a long period.

British American Tobacco, BAE Systems and Unilever are three companies that I like from this perspective. They’ve all paid out growing dividends in each of the last 10 years.

Higher yield

A higher dividend yield will allow me to reach my goal by investing a lower amount at the outset.

For example, the average dividend yield for the three companies noted above is 4.3%. Therefore, I’d need to invest a whopping £278,000 to earn £12,000 per year in dividends!

However, if I picked out higher yielding companies, I wouldn’t need to invest as much.

A combination of Persimmon, Rio Tinto and Barratt Developments would currently give an average yield of 12.1% if I invested in each equally. At this yield, I’d need a portfolio size of £99,000 to reach my £1,000 per month goal.

Frequency of payments

It’s important to note that listed companies pay out dividends at a different frequency to each other.

Some pay quarterly, others annually. So whilst my goal is to reach £1,000 per month in dividends, I’m actually likely to receive more than this in some months, but less in others.

Alternative approaches

Dividend shares aren’t the only way I could reach £1,000 per month. If I targeted growth stocks and took regular withdrawals, I could achieve the same goal in theory.

However, my worry with this is that the wider economy impacts share prices across the board. So in a bear market, I’m likely to be shrinking my portfolio substantially if I withdraw £1,000 per month.

I only invest in FTSE 100 or FTSE 250 companies in my portfolio. There are, of course, smaller companies paying large dividends frequently. But straying outside of the FTSE indices is beyond my investment portfolio risk appetite!

I think building my portfolio with dividend shares is a great way to earn passive income. I’m working towards hitting my £1,000 per month goal as soon as possible!

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 Yianni has positions in Unilever and Persimmon. The Motley Fool UK has recommended British American Tobacco and Unilever. 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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