Can I make £30,000 a year purely in passive income from dividend stocks?

Just how possible is it to have enough passive income from dividend stocks to live off? Jonathan Smith takes a look and offers his opinion.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s an interesting thought to consider whether I could make enough passive income from dividend stocks to actually live off. My current portfolio generates income, but not enough to consider moving to the Bahamas any time soon. The simple answer is that it’s possible to do this, but the higher passive income I want to generate, the bigger my portfolio needs to be. So is £30k actually realistic?

How to target dividends

First, I want to briefly run through how this would work. Dividend stocks pay me out income at several points during the year. By calculating the dividend per share, I can compare this to the share price. From this, I can calculate the dividend yield. For example, if the dividend per share is 5p and the share price is 50p, the dividend yield is 10%. 

Due to the range of different companies that are publicly traded, I need to be selective on the ones to buy. Logically, it wouldn’t make much sense for me to buy travel and tourism stocks at the moment. The pandemic has meant these companies need to retain cash flow. It’s unlikely any would be offering generous dividends to investors at the moment. 

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

In order to help me pick up a high level of passive income from dividend stocks, I’m looking more towards different sectors. At the moment, insurance, investment managers and utilities are three areas paying out dividends.

Can I really make £30k in passive income?

Let’s now move on to the numbers. The FTSE 100 average dividend yield is 3.12%. As mentioned above, I’m looking to target certain sectors when buying dividend stocks for passive income. Therefore, I think I could achieve an average yield of 6%. Using this figure, the maths is easy. If 6% of my capital generates £30k, then 100% would need to be £500k. So to summarise, I’d need to have £500k in the bank (or better still in an ISA) in order to make £30k a year in passive income.

This shows that it’s possible, but realistically not many of us have that amount of starting capital to invest in dividend stocks.

But I could build up to it. I could invest a chunk each month. I won’t be able to enjoy the passive income straight away, but I can work my way towards it. Under this method, I would need to invest £1,500 a month for 17 years to get to £500k. I’d also be needing to reinvest any dividend income I received during this period.

Even if I don’t have £1,500 right now, I can invest what I can to get the ball rolling. This doesn’t factor-in any risks though. For example, a company I invest in might stop paying a dividend (or even go under). This would reduce my overall yield. Or what happens if the share price falls significantly on a stock I own and I decide to sell for a loss? This would detract from my overall profit.

Overall, it’s possible to make £30k a year from dividends. My finances mean I’ll try regular investing instead of the lump sum method. It’ll obviously take me some time to build it up to replace my income, so in the meantime, I’ll use passive income to supplement my regular wages. But one day, I hope to get closer to my goal.

This AI stock is becoming a digital juggernaut in a £ 12.5 billion market!

🤖 Curious about the next big player in AI? 🤖

Our leading industry analysts have uncovered a trailblazing content platform that's revolutionising the industry with its unparalleled generative AI technology, setting new standards in creativity and efficiency.

Care for a sneak peek?

Trusted by global giants like Amazon, Disney, and Netflix, this innovative company is not just transforming digital media with AI-generated 3D content but is also capturing a significant share of a £12.7 billion market!

With a remarkable 62% gross margin, indicating exceptional profitability and operational efficiency, this company's growth trajectory positions it as a must-watch for savvy investors.

Best of all, we're offering exclusive access to the name of this game-changing stock, absolutely free!

Discover your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »