How much do I need to invest in shares to retire early and live on passive income?

What’s the magic number? Roland Head crunches the numbers and explains how he’s using UK dividend shares to build a passive income portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What’s the best way to build a passive income portfolio to fund an early retirement? Some people like investing in property, but it’s not for me. I prefer the low costs (and low hassle) of investing in UK dividend shares.

By holding my shares inside an ISA, I can also avoid paying tax on my dividends. Over time, I hope to build a share portfolio that will provide me with the income I’ll need to support my retirement. If things go well, I may even be able to retire early!

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Should you invest £1,000 in Barratt Developments right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barratt Developments made the list?

See the 6 stocks

How much will I need?

Everyone’s circumstances are different. But like many people, I hope my cost of living will be a little lower when I retire.

Industry estimates by the Pension and Lifetime Savings Association (PLSA) suggest three possible levels of disposable income too support retirement for a single person:

  • Minimum: £14,400 a year
  • Moderate: £31,300 a year
  • Comfortable: £43,100 a year

How much would I need to invest to generate this level of income from dividends? I’ve crunched the numbers on some examples.

FTSE 100 tracker fund

The FTSE 100 currently offers a dividend yield of 3.6%. If I put all of my investment cash in a low-cost FTSE 100 tracker fund today, this is what I’d need, based on the PLSA guidelines:

3.6% yieldMinimumModerateComfortable
Investment required£400,000£869,444£1,197,222

To be honest, these numbers are higher than I’d hoped for. Fortunately, I think I can do better than this by investing in individual shares.

A 5% income portfolio

At the time of writing, the FTSE 100 and FTSE 250 collectively contain 69 shares with a forecast dividend yield of at least 5%.

Over time, I’m fairly sure I could build a portfolio that would provide a 5% income with the potential for further growth.

Although dividends are never guaranteed, by aiming to hold around 20 different stocks, I think I could limit the impact of any individual dividend cuts.

If I’m right, the sum I’d need to retire would fall sharply:

5% yieldMinimumModerateComfortable
Investment required£288,000£626,000£862,000

Where I’d invest

Here’s an example of one dividend stock I already own that’s providing me with an attractive passive income. Retirement and insurance giant Legal & General Group‘s (LSE: LGEN) an example of a stock where investors are currently getting most of their returns upfront, in cash.

Although the group’s share price performance hasn’t been very exciting recently, the stock currently offers a chunky forecast dividend yield of 9.5%.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

With more than £1trn of assets under management, Legal & General benefits from economies of scale. However, I can’t deny there’s some risk here – this is a huge and complex business, making it hard for investors to spot any looming problems.

My investment case is based on the view that Legal & General’s fast-growing pension buyout business will remain a strong cash generator, supporting attractive dividends.

The company certainly has a good record in this area. It’s paid a dividend every year for over 30 years, only cutting the payout once in the 2008/9 financial crisis.

I see it as a reliable high-yield income stock. I plan to hold the shares for the long term.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

3 FTSE 100 safe haven stocks to consider as trade wars bite

I'm confident in the long-term outlook for the FTSE index of stocks. But these blue chips may protect investors from…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »

Investing Articles

These FTSE shares may offer some safety as Trump slaps tariffs on trading partners

FTSE shares moved lower on 3 April, after US President Donald Trump introduced hefty tariffs on its trading partners. These…

Read more »

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »