Generating a passive income from shares is a popular and proven strategy for building a retirement income. While dividends are never guaranteed and can always be stopped, building a diversified portfolio of well-supported blue-chip stocks helps to reduce the risk of unexpected pay cuts.
Targeting a £1,500 monthly income
I’ve chosen £1,500 a month as a target for a couple of reasons. First of all, my sums suggest this level of passive income can realistically be targeted with an investment of £250 a month.
Also, £1,500 a month gives a weekly income of £346. That’s 50% more than the current full State Pension of £221 a week.
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Here’s one stock I’d buy now
I’d aim to buy shares in large companies with a strong track record of dividend payouts and solid finances. Most would probably be FTSE 100 shares, but I’d also be happy to include some larger FTSE 250 companies.
Because dividends are never guaranteed, I’d aim to invest in 15-20 shares, diversified across different sectors.
FTSE 100 fund manager Schroders (LSE: SDR) is a good example of the kind of dividend stock I might buy today. This family-controlled business is one of the largest asset managers in the UK, with £774bn of assets under management at the end of June.
Schroders also has one of the best dividend records in the FTSE 100. The company’s payout hasn’t been cut for over 30 years and has risen by an average of 9.8% a year since 2004.
Unfortunately, fund managers are out of favour with investors at the moment. This sector-wide weakness has left Schroders trading on a modest 12 times broker forecast earnings, with a 5.8% dividend yield.
Admittedly, asset managers like Schroders face some headwinds. Cheaper passive products keep pressure on traditional fund management fees. At the same time, growing competition in areas such as wealth management and private capital could also slow growth.
Even so, I see Schroders as a well-run business with attractive scale and a long-term focus that’s likely to support future shareholder returns.
I think the shares could be worth considering as a Buy at current levels. Indeed, I’d certainly consider adding Schroders to my own portfolio if I didn’t already own shares in an asset manager.
How to get from £0 to £1,500
Schroders is one stock I’d consider buying. But how would this help me to build a fund to support a £1,500 passive income?
Once I’d set up a monthly payment of £250 into my investing account, I’d aim to sweep up the cash in the account every two or three months to buy a new position.
Over time, I’d create a portfolio of 15-20 shares. Assuming a long-term return of 8% in line with the UK market average, then after 30 years I’d have a total fund of about £370,000.
Drawing a 5% income from this fund would give me about £18,000 a year, or £1,500 a month.
By maintaining a focus on higher yielding stocks, I’d hope that the annual dividend income from the account would be enough to support a 5% withdrawal.
If it wasn’t, I’d considering selling a few shares in order to top up my income to its target level.
