Earning a sizeable passive income stream from dividend stocks doesn’t happen overnight. That’s why the merits of “time in the market” are championed by long-term investors. After all, stocks are volatile assets. By adopting a long investment horizon to ride out share price fluctuations, I maximise my chances of securing a positive return.
Starting at 30 with no savings, I reckon a target of £2,000 a month in dividend income would be achievable after years of dedicated investing.
Here’s a three-step plan I could use to turn that aspiration into reality.
1. Savings targets
First, I need spare capital to invest. One key advantage of dividend investing is it doesn’t require a large up-front cash pile. I can put modest amounts of money to work every month, letting my portfolio snowball over decades.
Earning a £24k second income is no mean feat. Accordingly, I’d set an ambitious, but achievable, savings aim. On a good salary, I think setting aside £300 a month should do the trick.
I’d also try to avoid selling my stocks for as long as possible to harness the power of compound returns. Therefore, it’s prudent not to allocate every spare penny in the stock market.
Maintaining an emergency fund of three to six months of expenses in an easy-access savings account is a handy buffer against unforeseen eventualities.
2. Buying dividend shares
Then, it’s time to invest in dividend stocks. Unlike interest on cash, dividends aren’t guaranteed. The potential rewards are greater, but this strategy has risks.
Even if a company has an unblemished dividend history, should it encounter future difficulties, regular shareholder payouts can be cut or abandoned altogether.
To mitigate these risks, diversification is important. By spreading my holdings across a range of businesses in different sectors, I’d limit my exposure to any single stock.
The value in portfolio diversification was demonstrated recently during the pandemic. While airline shares like IAG and easyJet plummeted and axed their dividends, some mining stocks, such as Anglo American, soared.
Covid-19’s impact on the stock market was sudden and no investor has a crystal ball. No matter how much conviction I have in any of my stocks, this serves as a reminder that future returns are never certain.
There are plenty of FTSE 100 and FTSE 250 dividend stocks I could buy. I might also look to overseas indexes like the S&P 500.
Some shares I own include:
- British American Tobacco — 8.8% yield
- Johnson & Johnson — 2.9% yield
- Tesco — 4.4% yield
3. Earning passive income
Finally, there’s the all-important question: how long will it take to earn £24k in annual passive income?
Imagine my portfolio delivered an 8% compound annual growth rate from dividend reinvestments and capital gains. If the yield across my holdings was 4%, I’d need a portfolio worth £600k.
By investing £300 a month, I’d hit my target in just over 34 years from contributions totalling £123k. That’s just in time for an enjoyable retirement!
These numbers might be too optimistic if my stocks performed poorly. However, my calculations are broadly in line with the stock market’s historic returns. If all goes to plan, earning a big passive income stream after starting with nothing at 30 isn’t as difficult as it might first seem.
