It’s nearly that time of year again. In addition to an Easter egg or two, I’ll be looking forward to the start of the new Stocks and Shares ISA season. This year I’m focussing on dividends.
Dividends are an excellent way to earn passive income, in my opinion. But how much is really needed to earn £2,000 a month?
Well, it depends. If an investor wants income soon, my trusty calculator tells me that they would require between £300,000 and £600,000. But why the big range?
That’s because it really depends on the dividend yield. At a 4% yield, the investor would need £600k, but at a 9% yield, they would only need £300k.
Many income funds deliver yields between 4% and 5%. That said, savvy stockpickers could pick up several FTSE 100 dividend shares yielding over 6%.
A smarter way
Either way, it’s a sizeable pot. A smarter way would be to plan ahead. Instead of targeting passive income in 2026, an investor could build income over time with far less upfront cash.
The way to do this is by owning dividend growth shares, and reinvesting dividends to buy more shares. In turn, these generate more dividends, which buy more shares. This snowball effect is a powerful way to accelerate investment growth.
Many reliable dividend shares are from solid FTSE 100 companies. Enter Legal & General (LSE: LGEN), the company that quietly powers pensions, life insurance, and asset management for millions.
It has reliably paid dividends to shareholders for decades. And in the vast majority of those years it managed to raise its dividend payment.
Right now, it offers a chunky 8.9% dividend yield. That’s the largest yield in the FTSE 100. It has also committed to ongoing dividend increases.
A top FTSE 100 dividend share
Legal & General should benefit from long-term trends over the coming years. For instance, ageing populations should drive demand for its retirement solutions.
Of course, even the most solid dividend shares aren’t risk-free. If the economy experiences an extended period of weakness, it could put pressure on earnings. The recent dip in its share price reflects short-term disappointment over a profit miss and market jitters from the war in the middle east.
Maximising a Stocks and Shares ISA
Going back to how much an investor would need to target £2k a month of income, consider this illustration.
Assume they invested £20,000 a year in Legal & General shares with dividends reinvested and growing at 5% a year. My trusty spreadsheet tells me it would take just eight years to blow past the income target.
I calculate by the end of year eight, the portfolio value would be worth £264,769 and annual dividend income would be £29,467. But here’s the most interesting part. The investor would only have put in £160,000. A far cry from the £600k mentioned earlier.
Personally, I prefer to own a selection of dividend shares rather than just one so I’m not putting all my eggs in one basket.
But, there you have it. Regular investments into a Stocks and Shares ISA, a bit of patience, and a steady-as-she-goes company could be enough to wave goodbye to the 9-to-5.
