There are many ways to generate a passive income. One of my preferred ways is to find stocks that pay dividends. This allows me to receive cash from payments while still keeping my initial investment in the company. By replicating this over several stocks, I can build a portfolio. But what are the specific numbers involved to generate a sizeable monthly payout?
Stripping it back
Before we get to the exact number, it’s really important to understand the strategy. After all, understanding the process of making money is often more critical than earning it further down the line. When looking at dividend stocks, one point is to house the portfolio in a Stocks and Shares ISA. The ISA wrapper means that dividends aren’t taxed. This means more of the payment can be enjoyed, rather than having to pay some away to the taxman.
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.
The second reminder is to reinvest dividends to benefit from compounding. If a stock yields 5% and someone invests £1,000, it’ll pay £50 over the coming year. If this is ploughed back into the stock, the £1,050 could yield £52.50 the following year. Over time, this compounding impact can really help build income.
Finally, we can’t ignore stock selection. Simply buying the companies with the highest dividend yield isn’t always the smartest move. The yield could be high due to the share price falling. This could be a red flag, as the future dividends might be cut. Therefore, time needs to be spent in actively selecting good income stocks with a clear dividend policy.
Talking numbers
I believe that with the right picks, an investor could achieve an average dividend yield of 7% for the ISA. Therefore, the ISA would need to be worth £128,571 in order to pay out £750 a month.
The restriction here is that the maximum that can be invested via an ISA is £20k a year. Therefore, it wouldn’t be until year seven that this goal could be reached. Further, someone might be more comfortable investing a smaller amount each month. This could push the timeframe back even further. Ultimately, achieving a set monthly amount of income depends on a variety of factors.
Idea generation
One company that could be worth considering for such an ISA project is the Social Housing REIT (LSE:SOHO). Over the past year, the share price is up by 29% in the past year, with a dividend yield of 7.05%.
As the name suggests, the real estate investment trust buys and manages social housing properties, especially specialised supported housing for vulnerable adults. Housing associations sign long-term leases, providing the company with sustainable, low-risk income.
This is a big factor why I believe the income going forward is sustainable. The bulk of the revenue is income that’s structurally supported by government welfare budgets. It even delivered a 22% increase in half-year earnings per share, thanks to “higher rental income, improved rent collection and a lower cost base”.
Of course, there are risks, such as cuts to local authority budgets that could filter down to lower spending on future housing arrangements. Even with this concern, I think the stock could be considered by investors.
