Every month I invest money in the stock market in a bid to increase my future passive income.
The reason I do this is because I’d like to reach a point one day when I can live off the tax-free cash dividends I receive through my Stocks and Shares ISA portfolio.
But is this realistic? And how much would I ultimately need to invest to make this happen? Let’s look at some numbers.
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How much?
Firstly, I need to determine how much I’d likely need. Naturally, this will largely depend on my lifestyle. If I want to move to Dubai and dine out on those 24k gold-leaf steaks every other night, then that’s going to need a boatload of cash. In contrast, a relatively frugal lifestyle will need far less.
The average annual salary for full-time workers in the UK was £34,963 in 2023, according to Statista. But whether that’s an adequate sum will again come down lifestyle, mortgage situation, and location.
If we go with £50,000 a year, then I’d need an £840k portfolio yielding 6% to generate this amount. But my ISA isn’t that large yet, which means it’s going to take a few more years to build towards that.
Moreover, £50k won’t get me as much in future due to inflation. My spending power will be reduced.
The maths
So, let’s go with £70k. To generate this, I’d need a £1.17m portfolio yielding 6% each year.
How long would that take to achieve? Well, again, that depends. If I started off with £10,000 and then invested £800 every month, it would take me just over 28 years to reach that £1.17m figure.
This assumes a compounded 8% annual return, with dividends reinvested rather than spent. This isn’t guaranteed, but it’s the ballpark historical average for UK stocks.
If I could invest £1,600 a month, achieving the same return, it would take me just over 22 years.
High-yield passive income
Now, as anyone holding bank stocks through the 2007–08 financial crisis will testify, dividends are never guaranteed. They can be cut or cancelled by companies to preserve cash.
To offset this risk, I’d make sure my portfolio is diversified across different firms and sectors (banks, miners, energy, insurers, consumer stocks, etc).
One share I’d include is insurer and asset manager Legal & General (LSE: LGEN). The FTSE 100 firm has been around for nearly 200 years managing risk, so is the type of boring-but-steady dividend stock I like.
It has a terrific track record of increasing its payout over many years. And right now, the stock is yielding an eye-popping forecast dividend yield of 9.3% for this year.
That’s one of the highest across the whole UK stock market!
So what’s the catch? Well, higher interest rates have been a headache for the company. This has seen the value of its assets under management fall, and there’s a risk this could persist.
However, I think things could improve when interest rates fall and stabilise. Meanwhile, the firm’s balance sheet is rock-solid and it recently re-committed to paying the dividend.
Long term, I see an ageing population driving more demand for Legal & General’s pensions business. I’m planning to buy more shares in August to lock in that meaty yield.
