It’s one thing to target making a few hundred pounds a month in passive income from dividend shares. That could enable me to to reinvest in more shares, or take the income and spend it. It’s a large enough amount to make a difference each month. But isn’t enough to live off. So it’s another thing to start thinking about the potential to make £25,000 a year instead.
Trusting the process
The process to make money from dividend shares doesn’t change much depending on the number I’m targeting. I still want to ensure that I do my research and pick dividend shares I’m confident in. This confidence should come from the fact that there is a high likelihood of receiving dividends long into the future.
Having such sustainable investments doesn’t change whether I’m wanting to make £100 or £100k as passive income. It’s equally important, and the most important factor when building a portfolio of dividend shares, in my opinion. No dividend is guaranteed, as it depends on future profitability. But if I can pick a company that has a track record of paying them out, along with a positive outlook, I do have some element of confidence.
One factor that could change when trying to make £25,000 a year in passive income is the risk level. I’m likely going to be trying to squeeze the most out of the lemon to reduce the initial amount I need to invest. This means targeting a high dividend yield. But usually, the higher the yield, the higher the risk.
This is something I need to be careful about. Ideally, I’ll look to reduce the dividend yield needed to a more reasonable level. In order to see which works the best for me, so it’s time to get into the numbers.
Numbers needed for the dividend shares
I’ll consider a few different scenarios to help me reach my end goal. The easiest one to compute is if I invested in the FTSE 100 average dividend yield via one lump sum. These dividend shares would give me a yield of 3%. So to make £25,000 a year, I’d need to invest £833,000.
This is a large amount of money, more than I have ready to deploy. I could increase the risk level and go for an average dividend yield of 6% instead. This would halve the initial investment needed to £416k. This is a considerably lower number, but again quite high for the average investor like me to stump up!
I think the best way for me to try and reach the goal is by investing in dividend shares each month. Allocating £1,000 a month into stocks with a yield of 6% would take me 19 years to get to my target. During this period, I would reinvest any dividends received, to help speed up the process.
It sounds a long time, but unless I have a large amount of cash liquidity, it’s the option that I think is most likely to get me to my passive income goal of £25,000 a year from dividend shares.
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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.
Motley Fool UK 2021