Earning passive income from the stock market is the cornerstone of my retirement plan. Fortunately for UK investors like me, there are plenty of high-yield FTSE 100 and FTSE 250 dividend stocks that I can buy in pursuit of this goal.
But what if I started investing with no savings at 40? Would it still be possible for me to build a nest egg in time to enjoy my later years?
I believe so, even with the risk of stocks underperforming. Here’s the three-step plan I’d put into action to target £1,500 in monthly passive income.
1. Save regularly
Developing good financial habits is crucial if I’m going to compensate for lost investing years. So I need to start with a savings goal I can meet every month.
With an ambitious target for an £18k annual second income from my portfolio, I’d set aside £6,000 a year — or £500 every month. That might sound like a lot, but I don’t think it would be unachievable living on a good salary with disciplined spending decisions.
Plus, it also highlights the benefits of investing as soon as possible. Due to the magic of compound returns, if I started investing before 40, I’d give myself a great head start in my progress towards my final goal.
2. Invest in dividend shares
Once I have some money saved, it’s time to buy dividend shares. Currently, the average dividend yield for the FTSE 100 index is 3.65%. For the FTSE 250, it’s 3.2%. As these benchmarks include a number of companies that don’t pay dividends, I’d aim for a higher yield.
Looking at the FTSE 100, insurance giant Legal & General currently yields 8.55% and housebuilder Taylor Wimpey yields 7.52%. Both companies seem attractively valued to me and I already own a position in the latter.
Turning to mid-cap stocks, FTSE 250 firms can also be excellent passive income picks. Bank of Georgia currently has an 8.13% dividend yield. In addition, as an ESG-conscious investor, NextEnergy Solar Fund looks appealing with a juicy 6.89% yield on offer.
Dividend investing isn’t risk-free. Unlike many cash savings accounts, the yields on these stocks aren’t guaranteed. After all, companies can axe or suspend their distributions at any point. However, I’d mitigate the risks by diversifying my investments across different companies and sectors.
If all goes to plan, I hope my stock market returns would eclipse what I’d make on cash.
3. Compound returns
So how long would it take to earn £1,500 a month in dividends?
Let’s assume I secured an 8% compound annual growth rate on my investments by reinvesting my pay-outs into more shares. If I secured a 4% yield on my final sum, I’d need a dividend portfolio worth £450,000.
I could reach that total after less than 25 years by following the steps above — just in time for my 65th birthday!
With the same target, if I started just five years earlier, I’d only need to save and invest £320 each month, rather than £500, to achieve the same goal.
Although earning a healthy passive income from the stock market is possible starting at 40 with no savings, I’d begin as early as possible to maximise my chances of building an impressive retirement nest egg.
