It’s an interesting thought to consider whether I could make enough passive income from dividend stocks to actually live off. My current portfolio generates income, but not enough to consider moving to the Bahamas any time soon. The simple answer is that it’s possible to do this, but the higher passive income I want to generate, the bigger my portfolio needs to be. So is £30k actually realistic?
How to target dividends
First, I want to briefly run through how this would work. Dividend stocks pay me out income at several points during the year. By calculating the dividend per share, I can compare this to the share price. From this, I can calculate the dividend yield. For example, if the dividend per share is 5p and the share price is 50p, the dividend yield is 10%.
Due to the range of different companies that are publicly traded, I need to be selective on the ones to buy. Logically, it wouldn’t make much sense for me to buy travel and tourism stocks at the moment. The pandemic has meant these companies need to retain cash flow. It’s unlikely any would be offering generous dividends to investors at the moment.
In order to help me pick up a high level of passive income from dividend stocks, I’m looking more towards different sectors. At the moment, insurance, investment managers and utilities are three areas paying out dividends.
Can I really make £30k in passive income?
Let’s now move on to the numbers. The FTSE 100 average dividend yield is 3.12%. As mentioned above, I’m looking to target certain sectors when buying dividend stocks for passive income. Therefore, I think I could achieve an average yield of 6%. Using this figure, the maths is easy. If 6% of my capital generates £30k, then 100% would need to be £500k. So to summarise, I’d need to have £500k in the bank (or better still in an ISA) in order to make £30k a year in passive income.
This shows that it’s possible, but realistically not many of us have that amount of starting capital to invest in dividend stocks.
But I could build up to it. I could invest a chunk each month. I won’t be able to enjoy the passive income straight away, but I can work my way towards it. Under this method, I would need to invest £1,500 a month for 17 years to get to £500k. I’d also be needing to reinvest any dividend income I received during this period.
Even if I don’t have £1,500 right now, I can invest what I can to get the ball rolling. This doesn’t factor-in any risks though. For example, a company I invest in might stop paying a dividend (or even go under). This would reduce my overall yield. Or what happens if the share price falls significantly on a stock I own and I decide to sell for a loss? This would detract from my overall profit.
Overall, it’s possible to make £30k a year from dividends. My finances mean I’ll try regular investing instead of the lump sum method. It’ll obviously take me some time to build it up to replace my income, so in the meantime, I’ll use passive income to supplement my regular wages. But one day, I hope to get closer to my goal.
Covid-19 is ripping the investment world in two…
Some companies have seen exploding cash-flows, soaring valuations and record results…
…Others are scrimping and suffering.
Entire industries look to be going extinct.
Such world-changing events may only happen once in a lifetime.
And it seems there’s no middle ground.
Financially, you’ll want to learn how to get positioned on the winning side.
That’s why our expert analysts have put together this special report.
If the pandemic has completely changed our lives forever, then they believe that this stock, hidden inside the tech-heavy NASDAQ, could be set for monstrous gains...
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.