With high inflation and the continuing cost-of-living crisis, the benefit of making passive income to support expenses is large. Even if the pressure eases over the next year or so, enjoying the cash from dividend stocks is something investors want even during the good times.
With that in mind, here’s how I’d aim to bank a lot from dividends within the next two decades.
Picking the right stocks
The target with this passive income strategy is different to some others. I’m not aiming to reinvest the dividends, but rather take the cash straight away and enjoy it.
Before I look into the specific numbers, I need to ensure my portfolio is up to scratch. The focus here is purely on dividend-paying gems. I’m wanting to bank sustainable income, so will filter for companies that have been paying out constant dividends for at least the past decade. It might surprise some to know that there are 18 FTSE 100 stocks with more than 10 years of consecutive dividend growth!
I also want to give preference to stocks that pay out quarterly dividends instead of an annual one. The advantage here is that if I can own a dozen or so stocks, then the chances of getting paid something each month is quite high. This avoids having several months without receiving any income at all.
Adding in the numbers
The two main levers that’ll impact how quickly I can get to £75k are the dividend yield and my regular investment amount.
The current average FTSE 100 yield is 3.76%. Yet the index has several stocks with a 0% yield. So if I’m selective in my picks, I feel I can achieve an average yield of 6%.
In terms of drip-feeding money in, I’m going to target £550 a month. This is subjective and will change from person to person.
In my first full year, I’d expect to earn £396 in income. The following year, I’d be able to enjoy £720. By year 21, I’ll have accumulated just over £76k.
Points to be aware of
My assumption is that any money I invest doesn’t appreciate or depreciate in value. In reality, this won’t hold true. I might find that my portfolio is worth more, in which case I’ll be able to enjoy further profits if I choose to trim my holdings at 55.
The risk is that the portfolio is heavily down in value. As a spiral of this, it may be that some of the stocks I own decide to cut the dividend per share payment in future due to underperformance.
I can also consider tweaking my strategy. There’s a huge amount of benefit in reinvesting the dividends I get, even in year one. This helps to compound my growth further down the line. Enjoying the £324 would be great in the short term, but my 55 year-old self would probably thank me more for reinvesting it!
