Making £1,000 in passive income every month is an ambitious goal. But, I could get there with a Stocks and Shares ISA, regular investing in the right companies, and some luck.
An annual dividend yield of 4% is on the low end of what I consider reasonable, and 8% is on the high end. A £300k portfolio would generate £12,000 a year in dividends if it had a yield of 4%. A £150k portfolio with an 8% yield would generate £12,000 annually.
Dividend stocks
I would want a portfolio of multiple dividend-paying stocks with a suitable yield. The good news is that plenty of well-known stocks have five-year average dividend yields between 4% and 8%. Some examples are:
- Aviva
- Persimmon
- Investec
- Rio Tinto
- SSE
- GSK
- Halfords
These stocks’ five-year average annual dividend yield ranges between a low of 6.3% for Halfords and a high of 7.91% for Aviva. All would be solid choices in a portfolio built to deliver £1,000 monthly in income. Of course, UK stocks tend to pay dividends twice a year, so it is more accurate to say equivalent to £1,000 monthly.
Building passive income
I won’t need to do much to receive income. But, it will take a lot of effort to set up a sufficiently sized portfolio to deliver it. I could use income stocks and reinvest the dividends, look at growth stocks, or buy an index tracker. Whatever I do, I need to invest some amount each month for years at a decent rate of return and let the power of compounding work its magic.
Let’s say I target a return of 6%. I can hit a portfolio value of about £165k by investing £250 per month for 25 years or £1,000 per month for 10 years. I could then look to get a portfolio yield of a little under 8% from dividend stocks and enjoy a passive income of more than £1k per month.
To get a portfolio closer to the £300k mark, I need to invest £500 per month at 6% for between 20 and 25 years, or £750 for between 15 and 20 years. A larger portfolio won’t require as high a dividend yield to hit my £1,000 per month target.
Starting early
If I invest enough every month into dividend-paying stocks with decent yields, reinvest the dividends, and do this over multiple years — perhaps decades — I can build a substantial portfolio. When the time comes, I can take the dividends instead of reinvesting them. If the portfolio is big enough and the yield is high enough, I could hit £1,000 monthly in passive income one day. The earlier I start, the better my chances.