Dividend investing is a popular method for generating passive income, leveraging successful businesses with a track record of returning profits to shareholders.
It’s a flexible strategy that can be adjusted to suit each investor’s financial situation. In this example I’m using a sum of £20,000, but the same principle applies whether someone starts with a smaller or larger amount.
Naturally, the level of income generated will vary depending on the amount of capital invested.
The route to £1k a month
A UK investor could realistically target a portfolio with an average dividend yield of around 7%. That means an immediate passive income stream of about £1,400 a year from £20k — or roughly £117 a month.
But the real magic happens through compounding. By reinvesting the dividends, the portfolio could steadily grow over time. Assuming the yield held, it would take roughly 30 years for that £20,000 to compound up to around £180,000.
Once that milestone’s reached, the passive income transforms entirely. At a 7% yield, it would pay around £12,600 annually, or just over £1,000 a month. That’s a handsome second income purely from dividends — no selling of shares required.
Of course, many people (myself included) might not want to wait three decades. By contributing an extra £100 a month, that same target could be achieved in roughly 20 years. The blend of fresh savings and reinvested dividends accelerates growth dramatically, demonstrating how even modest extra investments can slash years off the timeline.
One example
One stock to consider that I think fits this strategy is Phoenix Group (LSE: PHNX). It’s a major consolidator in the life insurance space, specialising in managing closed books of business and rewarding shareholders. Right now, it offers an enormous 8% yield, with dividends growing steadily for nine consecutive years at an average rate of 3%.
The main drawback? It’s currently unprofitable, weighed down by the quirks of insurance accounting and by managing older life funds. Its balance sheet also shows £4.18bn in debt, which is significant. Dividends risk a cut if earnings slip further.
However, this is offset by £4bn in operating cash flow, supporting its hefty payouts. Meanwhile, its enterprise value stands at £11.3bn and the market-cap has climbed 32.7% in the past year, signalling investor confidence.
Recent broker views have been supportive. On 6 June, Deutsche Bank upgraded Phoenix to a Buy with a target price of 720p. Citigroup put in a similar Buy recommendation in late May. It’s also encouraging that the wider European life insurance sector has been performing well, led by strong solvency positions and stable demand for long-term savings products.
The bigger picture
Phoenix is just one example. The FTSE 100 hosts many blue-chip dividend shares across sectors like energy, telecoms, finance and consumer staples. Many of them offer yields upwards of 6%, with multi-year track records of growing payouts. By diversifying across 10 or 15 such holdings, an investor can reduce company-specific risks while achieving a high average yield.
For me, this is one of the simplest, most dependable ways to work towards a second income. It might not be as glamorous as chasing the next tech rocket ship, but it’s a strategy grounded in dependable cash flow and a solid dividend history.
