Is it really possible to earn a four-figure passive income each month by drip feeding money into the stock market?
The answer is yes.
Now, there are no guarantees when it comes to dividends. A company’s business may turn downwards and no longer generate enough cash to pay dividends at the level it once did.
But by carefully choosing a diversified portfolio of high-quality dividend shares, I think an investor can realistically aim to generate an average monthly passive income of over £1,000.
Calculating the dividend bonanza
How much somebody earns in passive income will basically depend on two key factors.
Those are, first, how much they invest, and secondly, at what dividend yield.
The yield is what an investor earns each year in dividends as a percentage of what they pay for the shares.
So, for example, to earn £12k of passive income annually (£1k per month) at a 10% yield would require an investment of £120k. At a 5% yield, it would take £240k.
Honing in on quality
That might make it sound like 10%-yielding shares could be the way to go.
But remember that, as I mentioned above, no dividend is ever guaranteed to last.
So the smart investor looks not only at the size of a dividend but also its source – and how likely it seems to last.
Currently, the FTSE 100 index of leading shares offers a yield of 3.1%. In today’s market, I think an investor could realistically target a 7% yield while sticking to blue-chip dividend shares.
Building an income stream over time
At a 7% yield, the £12k target would require an investment of close to £172k.
If someone had a lump sum of that size, they could invest that and hopefully start earning a passive income within months.
But another approach would be to build the income up over time, by drip-feeding money in and initially reinvesting the dividends (something known as compounding).
Doing that with £800 a month, after 12 years the portfolio should already be worth over £177k.
At a 7% dividend yield, that would equate to a monthly passive income of over £1,000.
Getting ready to invest
By the way, I mentioned making regular contributions. But to what?
There are lots of options, so It makes sense for an investor to explore what seems suitable for them – for example, a share dealing account, Stocks and Shares ISA, or trading app.
High-yield share
One dividend share I think investors should consider is FTSE 100 asset manager M&G (LSE: MNG).
The company has a yield of 7.4%. It also aims to grow its dividend per share each year.
Will it be able to do that, as it has in recent years?
That will largely depend on M&G’s business performance. One risk I see is that clients could withdraw more funds than they put in, reducing commission income. M&G has struggled with that in recent years.
But the first half of this year saw a positive inflow of funds.
The company also has a number of strengths I like, such as its strong brand and large client base spread across multiple markets.
On balance, I think the business is well-positioned for future cash generation and see it as a share for investors to consider.
