I think it’s true to say that most of us are fans of passive income. Although there are various different channels to build up a stream of such money, I always find myself reverting back to dividend shares. The ease and lack of minimum investment size make this appealing to me. And even when I set my sights on a larger long-term goal of making £10k a year, I still can make it possible.
Starting now
Unless I have a large lump sum sitting in my bank account (plot twist, I don’t), I’m not going to be able to make £10k in dividend income this year. But that doesn’t take away from the fact that the key first point is for me to start straight away.
This is because without a high initial deposit, I’m going to have to spend time building up the size of my portfolio before I can hit my target. So the earlier I start, the earlier I’ll reach my goal.
Taking balanced risk
I could decide to invest in companies within the FTSE 100 and FTSE 250 with yields above 10%. Although I could build a portfolio out of this, it would be high-risk in my opinion.
On the other hand, investing solely in stocks with yields in the 3%-4% range (around the FTSE 100 average) probably isn’t my best option. This is because it’s going to lengthen the time it takes for me to hit my target.
So I’m going to take measured risk in buying above average dividend stocks with yields in the 5%-7% range.
Regular investment
Finally, I need to be able to commit to investing on a weekly, monthly or quarterly basis. Given that I get paid monthly, I prefer this timeframe. Each month, I need to put away what I can afford to buy new dividend shares.
From running the numbers, I have some flexibility in the amount I can invest each month. At the higher end of the range, I could (at a push) invest £1,000 a month. With an average yield of 6%, I’d reach my goal in a decade.
Trimming this down to £500 a month would increase the timeframe by six years. However, I prefer this as it puts less pressure on my finances.
Given that I’m still going to be working for the next 16 years, it suits me. By reinvesting the dividends over this time period, I’ll be able to enjoy £10k of passive income from year 17 onwards.
Risks associated with passive income
It’s too simple to conclude that I’m not going to have any problems along the way when I’m investing over the next decade. Part of the issue is down to me. I might have expenses or other commitments that cause me to miss investing. This will slow down my build-up of passive income.
Another concern relates to the stocks I buy. Even though a company is solid and performing well now, who knows that could happen years down the line? A dividend cut means that I need to be closely monitoring the portfolio.
That’s also why I aim to build a diversified portfolio so one stock or sector suffering shouldn’t damage my total returns too much.