There are many different side hustles out there focused on making passive income. Personally, I like the method that involves picking up dividends from income stocks. One of the main reasons why this is my favourite idea is that I can scale it up to make high levels of money further down the line.
Here’s why and how I think I can generate five figures a year from it.
Reinvesting for years to come
Before I get to the numbers, it’s key to understand the concept of dividend income and reinvesting it. If someone told me that I could make five figures annually straight away from dividends, I wouldn’t believe them. Sure, if I had a huge pile of cash lying around then maybe I could, but for most normal people like me it just isn’t possible in the short term.
Yet over time, this concept for passive income does work. The investment thinking is built around putting aside money each month into top dividend stocks with high yields. Over time, this pot builds up. Whenever I get paid a dividend, I’ll reinvest this money straight away back into the stock.
The benefit of reinvesting my dividends is that it can help to increase my long-term income by compounding. For example, if I invested £1,000 in a dividend stock and got paid £80 as an annual dividend, I can buy more shares in the company. Then next year, my £1,080 worth of stock will make me £86.40, assuming the dividend yield stays the same. Of course, dividends are never guaranteed and can be cut at any time.
Over several years, the impact of this is the key reason why I feel that I can reach my passive income target.
Running the numbers
Now that my strategy is set, I need to decide how much I can afford to put away each month. I’m going to aim for £1,000. Over time, I can change this amount higher or lower if needs be.
The other parameter I need to decide on is my average dividend yield. I wrote earlier this week of a collection of stocks that give me an average yield of 10.6% currently. To keep the numbers easy, I’ll set a 10% yield for this example.
On that basis, it’ll take me just over six years to have an investment pot with a value of £100,000. From there, my 10% yield will earn me £10,000 for the 12 months.
If I reduce my monthly payment down to say £500, it’ll increase the time it takes for me to reach £10,000 by four years. If I have time on my side and want to reduce the pressure on my monthly cash flow, I think this is a viable alternative that I’ll consider.
Remembering the risks with passive income
I’d be naïve if I thought the above concept would be plain sailing. I’ll no doubt have issues along the way. For example, I might have a requirement for cash in years to come that will put this strategy on hold. Or I might need the passive income early and not reinvest it. I could also be faced with a company that cuts the dividends. Yet ultimately, I don’t think any of those points should stop me in starting the process.