It’s an interesting time for those of us looking to generate passive income from our savings and investments. Interest rates are at levels that I’m almost entirely unfamiliar with and there’s no shortage of stocks paying sizeable dividends.
In this environment, I believe there is the potential for investors, like me, to generate enough income to quit work, and live comfortably off dividends.
How it works
Dividend stocks are well represented in my portfolio. These companies provide me, and other shareholders, with a regular reward in the form of dividends. These can be quarterly, biannual, or annual.
So, how can I live off my investments? Well, I’d need to have a considerable amount of money invested in dividend stocks. Collectively, the dividends will have to cover everything from my mortgage to my household bills and other expenses.
I’ve also got to think of cash flow. Currently, I pay myself from my company’s earnings every month. But it doesn’t work like that when I invest in stocks. I’m going to need constant cash flow throughout the year to ensure I can make payments on time, or even just go on holiday when I want to.
What I need
Several aspects of my life are going to change in the next few years, but based on the last 12 months, and my current London lifestyle, I’d say I need around £50,000 a year to live on. I appreciate that’s a lot of money, but I’d still be taxed on that income, and if I’m not going to be working, I’m probably going to be spending more money.
As I’ve said before, I think the highest sustainable yield at the moment is around 8% (though past performance is not an indicator of future results and dividends are never guaranteed). That’s looking at companies like Legal & General, and Phoenix Group — neither offer much in the way of share price growth — as well as housebuilders such as Vistry Group.
But even with an averaged dividend yield of 8%, I’d still need £625,000 invested in dividend stocks. That’s a considerable amount of money. It’s a figure that the vast majority of us just don’t have.
Compounding
It may not sound like the most exciting investment strategy out there. But a compound returns strategy can help us transform a relatively small amount of money into a much bigger one.
For example, if I start with £50,000, and I reinvested the 8% dividend yield I receive every year, I can grow my pot at an exponential growth rate. I’d also want to be adding to my pot. After 22 years of reinvesting and contribution £300 a month — while increasing this contribution by 5% a year — after 22 years, I’d potentially have £625,000.
The only issue is, in 22 years, is £50,000 going to be enough to live on? It’s possible for sure. As is always the way, the more money I have now, the easier it is to generate money!
