Instead of working extra hours, investors can snap up income shares to start earning extra money while sleeping. It’s a proven strategy towards achieving the goal of financial freedom. But how much money do investors actually need to invest to start earning a meaningful sum?
Crunching the numbers
With the average dividend yield of UK shares typically around 4%, it would require an investor to have a £150,000 portfolio when aiming for a £500 monthly income.
However, income investors tend to be drawn towards higher-yielding opportunities. And even if a portfolio’s yield increases by just 1% to 5%, the amount of money needed drops by £30,000. Still, it’s unlikely someone’s going to find £120,000 tucked under the mattress. Fortunately, even those with no savings and only £350 to spare each month can eventually reach this milestone in the long run.
By reinvesting the 5% yield and earning an average 4% capital gain each year, a £350 monthly investment can grow into a £120,000 portfolio in about 14 years. And for those willing to wait a full two decades, the passive income would grow well beyond £500 a month, closer to £970.
Avoiding income traps
The London Stock Exchange is hardly short of income opportunities. In fact, it’s home to some of the most generous income shares worldwide. But just because a stock pays a chunky dividend yield, that doesn’t automatically make it a good investment.
Perhaps Vodafone (LSE:VOD) serves as a perfect example of this. Throughout 2023, the telecommunications giant had one of the highest yields in the FTSE 100, paying out close to 10% a year. Anyone who decided to snap up this opportunity was probably pretty happy until May 2024 came knocking.
Despite dividends having remained stable since 2019, the group’s debt burden had been steadily growing and increasingly troublesome even before interest rates were hiked. And with new management brought in to try and fix the problems, the dividends were slashed in half.
It’s important to remember that dividends aren’t guaranteed. They exist as a way to return excess cash flow to shareholders when the company has no better use for it. But with profits being squeezed, dividend sustainability started to dwindle until it finally reached a tipping point.
That’s why it’s crucial when hunting for income opportunities to not focus solely on the dividend yield. Instead, investors should pay close attention to a business’s cash flow-generating capabilities and profit margins.
What’s next for Vodafone?
While Vodafone shares have had a rough ride in recent years, their performance in 2025 has been far more positive, climbing by 17% since January.
Following the dividend cut along with several non-core disposals, management’s been able to start filling the cracks in its balance sheet. At the same time, improvement efforts in customer service while expanding operations here in the UK have started bearing fruit.
So now that the recovery’s underway, should income investors reconsider this FTSE 100 business? Personally, I’m staying on the side of caution. While there’s no denying the business has made tremendous progress, it still has a long way to go before dividend growth’s likely to materialise. So until then, I think investors are better served exploring other income share opportunities.
