Sometimes I’m dismayed when I think about where I want to be versus where I currently am with regards to my financial goals. Thinking about how much passive income I want to be able to enjoy further down the line is one example. Yet thinking logically, I realise I only need to invest a relatively modest sum on a regular basis to achieve my aim. Here’s how.
Benefiting from compounding
I can comfortably commit to investing £50 a week going forward in dividend shares. Once or twice a year, these stocks should pay out income to me as a shareholder. If I pick a broad range of companies, I should be able to receive some form of payment each month.
Certainly for the first few years, I want to take these dividends and reinvest them into the stocks. This provides me two ways of speeding up my progress to reach my end goal. I’ll benefit firstly from the continued £50 a week that I put to work. I’ll also enjoy the added money that I put back in from the dividend payments.
Then when the next payment comes along, I have a larger stake in the business. This will entitle me to a larger dividend payment (assuming the dividend per share hasn’t decreased). This concept is known as compounding.
Running the numbers
I’ve figured that I’d like to be able to enjoy £100 a month in passive income for the rest of my life. So with £50 a week, how quickly can I reach this goal?
I’m going to assume that I pick stocks with an average dividend yield of 6%. I’m going to also assume that any reinvested dividend money is put back at this same yield in the future.
On that scenario, it would potentially take me seven years to reach my aim. Sure, that sounds like a long time from today. But at £50 a week, I’m happy to have this ticking over in the background.
The average yield makes a difference in the timings. If I want to choose more conservative options, a 4% yield will take me 10 years. On the other hand, an aggressive 8% yield would allow me to start enjoying the income after just over five years.
If I receive a bonus from work or some other kind of lump sum payment along the way, I can include this as well. This could materially speed up the time needed. Or I could supplement my income portfolio by putting extra cash to work on some growth stock ideas.
Passive income risks I need to be aware of
Even with the best will in the world though, problems will come along. There’s the risk that I can’t keep up with the weekly investment amounts. I think this risk is low, but still possible.
Further, what if the dividend stocks I buy stop paying income? I’ll have to monitor this carefully and might be in a position where I have to sell stocks and replace them. The risk here is that my average dividend yield could fall. If it does, then it’s going to increase the time needed to reach my passive income goal.