Buying income shares is a terrific first step towards financial freedom. The passive income generated from dividend stocks starts small. But when left to compound over the long run, a few extra pounds each month can grow into hundreds, or possibly even thousands. And best of all, it doesn’t actually take that much capital to get the ball rolling.
Of course, investing isn’t free from risk. Allocating capital to low-quality stocks can backfire and actually destroy wealth rather than create it. So let’s explore how investors can avoid such pitfalls, and calculate just how much money it takes to target a £500 monthly passive income.
Crunching the numbers
The size of a portfolio needed to earn an extra £500, or £6,000 a year, from dividends ultimately depends on the yield. Right now, the FTSE 100 offers a dividend yield of 3.3%. So for investors relying on index funds, they’d need to invest just over £180,000.
Obviously, that’s not pocket change. But by drip feeding £500 each month into an index fund that generates an 8% total return, small investors can potentially reach this threshold in around 15 years. And the journey can be made a lot shorter if a well-executed stock-picking strategy is chosen instead.
By only investing money into high-quality dividend stocks, investors can unlock higher yields. And if a portfolio generates the same return but at a dividend yield closer to 6%, only £100,000 is needed to meet the target of £500 monthly passive income – cutting the journey to just over a decade.
Exploring 6% dividend stocks
Looking at the FTSE 350, there are currently 48 businesses offering 6% or more through shareholder payouts. This includes B&M European Value Retail (LSE:BME).
The retailer has had a bit of a rough time lately, with its share price falling by almost 30% since the start of 2025. Digging deeper, the group’s like-for-like sales growth has slowed, missing analyst expectations due to a combination of macroeconomic headwinds, rising costs, and unfavourable weather conditions.
However, with the damage now already done, are investors looking at a rare opportunity to lock in a 6% yield?
Despite the operational challenges, dividends have continued to flow into the pockets of shareholders covered by ample free cash flow. This is also being supported by multiple cost control initiatives to improve efficiency and reduce the pressure on profit margins.
As such, the latest analyst projections suggest that B&M is set to continue its current multi-year dividend hiking streak. And with the company showing early signs of improvement, the stock’s started to recover, climbing by almost 20% since August.
Risk versus reward
Financially, B&M’s impressive dividend yield seems to be sustainable. Having said that, dividends could still be compromised. Suppose management’s efforts to offset cost inflation fail and profitability continues to suffer? In that case, the company may be forced to cut shareholder payouts to preserve cash.
At the same time, continued weakness in the UK economy could further drag down consumer spending, putting pressure on revenues as well. And this threat’s only compounded by other value retailers looking to steal market share.
Nevertheless, with a solid track record and robust financial position, investors hunting down income shares may want to take a closer look at B&M.
