It’s one thing to target making a few hundred pounds a month in passive income from dividend shares. That could enable me to to reinvest in more shares, or take the income and spend it. It’s a large enough amount to make a difference each month. But isn’t enough to live off. So it’s another thing to start thinking about the potential to make £25,000 a year instead.
Trusting the process
The process to make money from dividend shares doesn’t change much depending on the number I’m targeting. I still want to ensure that I do my research and pick dividend shares I’m confident in. This confidence should come from the fact that there is a high likelihood of receiving dividends long into the future.
Having such sustainable investments doesn’t change whether I’m wanting to make £100 or £100k as passive income. It’s equally important, and the most important factor when building a portfolio of dividend shares, in my opinion. No dividend is guaranteed, as it depends on future profitability. But if I can pick a company that has a track record of paying them out, along with a positive outlook, I do have some element of confidence.
One factor that could change when trying to make £25,000 a year in passive income is the risk level. I’m likely going to be trying to squeeze the most out of the lemon to reduce the initial amount I need to invest. This means targeting a high dividend yield. But usually, the higher the yield, the higher the risk.
This is something I need to be careful about. Ideally, I’ll look to reduce the dividend yield needed to a more reasonable level. In order to see which works the best for me, so it’s time to get into the numbers.
Numbers needed for the dividend shares
I’ll consider a few different scenarios to help me reach my end goal. The easiest one to compute is if I invested in the FTSE 100 average dividend yield via one lump sum. These dividend shares would give me a yield of 3%. So to make £25,000 a year, I’d need to invest £833,000.
This is a large amount of money, more than I have ready to deploy. I could increase the risk level and go for an average dividend yield of 6% instead. This would halve the initial investment needed to £416k. This is a considerably lower number, but again quite high for the average investor like me to stump up!
I think the best way for me to try and reach the goal is by investing in dividend shares each month. Allocating £1,000 a month into stocks with a yield of 6% would take me 19 years to get to my target. During this period, I would reinvest any dividends received, to help speed up the process.
It sounds a long time, but unless I have a large amount of cash liquidity, it’s the option that I think is most likely to get me to my passive income goal of £25,000 a year from dividend shares.