If someone asked me how much passive income I’d like to make each month, I’d probably say £1m. In reality, I’m constrained by several factors. Most notably, the amount of money I can afford to actually invest in income-paying assets such as dividend stocks. Therefore, with £1k to invest at the moment, here’s how much I think I could generate from dividend shares.
Thinking about my risk appetite
It shouldn’t come as a surprise that there isn’t one set figure for the amount of passive income I could earn. It depends on a variety of factors.
For example, my risk tolerance. Although it’s not an exact science, usually the higher the dividend yield of a particular stock, the higher the risk associated with it. I saw this recently with Evraz, a mining stock with large exposure to Russia. The dividend yield was exceptionally high (above 50%) for a period of time before the dividend was cut.
On the other hand, a stock like National Grid has grown or held the dividend per share for the last two decades. Yet the dividend yield is at a fairly modest 4% at the moment.
If I want to be fairly conservative, then I could invest my £1k into stocks similar to National Grid. This would generate me £40 in passive income for the next year. This assumes that the companies I invest in don’t cut the dividends during this period.
If I go more aggressive, then I can build a portfolio yielding 10% if I search in the FTSE 100 and FTSE 250. This would increase my passive income to £100 a year.
Passive income for years to come
Another key point I want to think about is whether this £1k is going to be a one-and-done investment, or part of a regular investing plan.
If this is all the money that I’ll have spare this year, then I’d be happier to increase my risk and go for higher-yielding stocks.
If I’m going to have more free funds later this year, then I’d prefer to go for more sustainable options. The reason for this is that over time, my passive income can really grow. If I keep topping up my dividend stocks with new funds, my passive income could jump from £40 this year to £100 or more next year.
Further, by reinvesting the dividends that I get this year back into the stocks, I can enjoy more income in later years instead.
So the difference here is what mindset I have. Do I just want to make passive income for this year, and max it out? I’ve no burning need to make as much as possible right now. Therefore, I think I’m better off investing in stocks that have a proven track record in paying dividends. By regularly investing more, I feel that I can grow my portfolio to a stage where in years to come I can easily eclipse the amount I could earn in this year alone.