According to the Office for National Statistics (ONS), the average UK salary is running just below £30,000 a year.
I could comfortably live on that much money. So, getting it from share dividends would allow me to retire from paid work.
Passive income from share dividends
To me, dividends are one of the best sources of passive income. But how large would a share portfolio need to be to generate £30,000 in annual dividend payments?
One reasonable estimate comes from looking at the dividend yield of the FTSE 100 index. The London Stock Exchange states the current yield as near 3.5%. So, I could put my money in a tracker fund and harvest that income. The 3.5% yield would need to deliver a passive dividend income of £30,000 a year. And my calculations reveal it would take an investment worth almost £860,000 to achieve that.
However, the FTSE 100’s dividend yield isn’t a static figure. The companies in the index have been under pressure because of the pandemic. And historically the yield of the index has been higher. But, to be fair, it has been lower as well.
Yet a Footsie tracker fund isn’t the only investment that provides a dividend. Some individual company stocks have a higher yield. And I could create a portfolio using them. For example, energy company National Grid yields above 5%. And smoking products company British American Tobacco is above 8%.
But the size of a dividend paid by companies depends on the strength of the underlying business. Directors have the power to raise, lower, and eliminate shareholder dividends whenever they wish. And they often do. For example, we’ve seen a lot of stalled dividends during the pandemic.
Compounding gains
And on the other side of the discussion, businesses often aim to raise their dividends each year as well. Indeed, many companies operate a progressive dividend policy to reward shareholders when an underlying business is doing well.
Overall, though, I think the 3.5% estimate used in the above illustration is at least realistic and perhaps on the conservative side. So, it’s prudent for me to aim for a portfolio worth the £860k mentioned.
And I’m aiming to build up the value of my share portfolio to that level by investing new money every month into UK shares I’ve researched and chosen carefully. My focus is on the process of compounding gains. So, I aim to pick the shares of businesses with the potential to grow. And I reinvest all dividends and other cash gains along the way.
Of course, share prices and dividends can rise and fall. And sometimes even stocks I’ve chosen with care can lead to a losing investment if something goes wrong in the underlying business. Indeed, stocks carry risks as well as positive potential.
Nevertheless, I’m embracing the uncertainties with the goal of building my investment pot over time.