For many investors, generating a passive income is the number-one goal. Their dream is to create the financial freedom to grow in later life, and to devote more time to something other than working flat out.
At 50, retirement feels a lot closer than it did at 40. There are fewer working years left to build wealth, and less time to recover from any nasty market shocks. But there’s still a decent window of opportunity.
Running the numbers
To target £1,000 a month of passive income by age 65, based on a 6% average dividend yield across a portfolio of FTSE 100 dividend income stocks, would require a pot of around £200,000.
Assuming 7% average annual growth, a 50-year-old would need to invest around £700 a month for the next 15 years to achieve that. In fact, they’d get £225,000 which is even better.
It’s a stretch for many at this stage of life. However, if they invest via a Self-Invested Personal Pension (SIPP) they can claim tax relief on contributions. This would cut that £700 to just £560 a month for a 20% taxpayer, or £420 for a 40% taxpayer.
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.
I’d favour building a balanced portfolio of solid dividend income shares and holding on through thick and thin. One familiar name that income investors might consider buying is Rio Tinto (LSE: RIO).
Dividends dig deep
The global miner hasn’t had an easy run. The share price is down more than 15% over 12 months, and 8% over five years. That reflects slowing demand from China, which is still struggling to reboot its economy, while the rest of the world flirts with recession.
Despite that, the dividends have kept flowing. In 2024, Rio paid out $6.5bn to shareholders, maintaining a 60% payout ratio. The trailing yield now sits at just over 7%, one of the most generous on the FTSE 100. However, it’s expected to fall to 5.85% this year.
The stock looks cheap, trading at a price-to-earnings ratio of 8.88. On 19 February, it reported underlying 2024 earnings of $23.3bn and net cash flow from operations of $15.6bn. Profit after tax came in at $11.6bn.
Shareholder rewards
Rio’s acquisition of lithium producer Arcadium should add diversification. Reports suggest incoming CEO Simon Trott could also explore major M&A opportunities, while sharpening productivity and cutting costs.
There are risks. Global demand for metals may stay weak as global struggles continue. Miners face constant operational threats too. In May, Rio warned that iron ore shipments at its flagship Pilbara operation in Western Australia could come in at the lower end of forecasts, due to weather disruption.
But a portfolio that includes stocks like Rio, mixed with defensive dividend payers and long-term growth plays, could potentially deliver that 6% average yield. Combined with compound growth, that’s a realistic route to generating a £1,000 monthly passive income by age 65.
With 15 years to go, there’s not a second to lose. But with the right strategy and enough discipline, there’s still time to build a serious second income.
