When I think about an amount of money that would make a tangible difference to me each month, £1,000 comes to mind. That four-figure sum would enable me to do plenty of different things each month. From booking a summer holiday (I’m optimistic), to being able to spend more on my wants versus needs, the possibilities are endless. Actually making that passive income is the hard part. But with careful planning, I believe there’s a way I can try to get to this figure via dividend income from UK stocks.
How I’m making passive income
Before I get into the numbers, I want to run through the concept. When I buy shares in a company, I’m entitled to some of the profits that are paid out to shareholders. Usually once or twice a year, a business will pay out a dividend to its owners, based on the profits for that period. I receive this as cash. When I weigh up the dividend per share versus the price I bought the share for, I can calculate my dividend yield.
The higher the dividend yield, the higher my passive income from investing in the company. It’s known as “passive’ income because I don’t have to run the business myself. The managers run it, with the aim of generating a profit (and paying out dividend income). All I have to do is stump up the cash to begin with and buy the stock. Deciding which shares to buy to make me the most sustainable income is the only real active part of the process.
There are risks to this strategy. The main one, in my opinion, is that a dividend isn’t guaranteed. It’s not like a bondholder who gets paid a set coupon each period. Dividends are paid out depending on profitability. There were plenty of FTSE 100 companies that cut dividends last year due to the impact of Covid-19. So I need to be aware that the income generated can fluctuate, and my dividend yield can change if the company reduces (or even axes) the payout.
Getting to £1,000 a month
So what do I need to do to generate £1,000 a month? There are actually several approaches, depending on my financial situation. I’m going to assume that the average dividend yield I’ll be making is 6%, although I could achieve more than that, but I could also get a lot less. If I were to have large cash savings or got an inheritance windfall, I could invest £166,666 as a lump sum. This would generate me £1,000 a month.
If I don’t have such a large starting balance, I’ll have to work my way up to it. If I invest £750 a month, and reinvest my dividends, I’ll potentially get to the figure of £166,666 in year 12. From then on, I won’t have to reinvest the dividends and I could enjoy the £1,000 a month as passive income. I do need to be aware that the share price of the stocks fluctuates. If I need to sell stocks for any reason, this could result in a capital loss if the share price has fallen.
But even with those caveats, I feel it’s achievable for me to reach the goal of making £1,000 passive income a month from dividends. On balance I think the risks are manageable with careful planning.