Passive income: how I’m aiming to earn £400 a month in dividends

Passive income is money earned when we aren’t working and is the key to achieving financial independence. James Reynolds outlines his strategy to earn £400 a month in dividends.

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.

Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

Image source: Getty Images

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.

Key points

  • Passive income can be achieved through dividend investing
  • High yields aren’t always sustainable
  • I’m building a diversified portfolio of UK-based companies

Passive income is money earned while we aren’t working. Building a consistent stream isn’t easy and takes years of dedication. But it’s not impossible. I could start a business, or rent out property. But neither of those options will start generating passive income right away and they also involve some extra work. The best way I know how to achieve my aim is with dividend investing.

Dividend investing

Dividends are payments made to shareholders from a company’s profits. These payments can be issued once, twice, or even four times a year, and they’re generally indicative of a company’s profitability. Dividend investing is a method by which investors construct a portfolio of dependable firms that provide a consistent dividend that can then be reinvested. This technique is quite popular in the UK, and we’ve witnessed record-high dividend yields in recent years. Some have even gone as high as 13% or 15% of a share’s value!

Yields and sustainability

These high rates, however, are typically unsustainable in the long run. For example, in 2019, mining firm Evraz paid 53p per share, representing a staggering 13.39% of the share price. But the company only paid 42p in 2017 and nothing in 2015 or 2016.

The average payout of big listed corporations in the UK is roughly 4%. This year BAE Systems and Unilever are scheduled to allocate 4.05% and 3.97%, respectively. But it’s important to understand that no firm is required to raise, retain, or even pay a dividend. The importance of consistency can’t be overstated.

Portfolio size

I figure I’ll need a total pool of £125,000 to meet my monthly objective of £400 in passive income. 4% of £125,000 is £5,000. That’s £416.60 if I split it over 12 months.

While I don’t have that kind of cash on hand, if I set aside £350 every month, I’ll be able to attain that magical figure in roughly 30 years.

Granted, 30 years is a long time, but if I start investing that money immediately, compound interest will help me get there sooner. Now all I have to do is pick a few businesses in which to invest.

My preferred companies

While the goal is to seek out secure organisations I can trust, I believe it’s worthwhile to take a few chances in order to accelerate my pot’s growth. I’ve already written about Imperial Brands. Since 2002, the tobacco firm has issued a substantial dividend to its stockholders at least twice a year. Today’s yield is a fantastic 8%.

I’m not overly concerned if it decides to reduce its dividend payout because my plan’s benchmark is 4% over 30 years. Anything over that is a bonus.  However, I believe it’s critical that I don’t rely only on this technique and instead diversify my portfolio with smaller-yield firms.

Lloyds Bank pays a dividend of roughly 2.37%, lower than my target return, but banks are generally stable businesses. Finally, I’d go with Unilever as it’s a huge, prosperous firm that now pays almost 4%.

None of this is guaranteed though. Investing always entails risk. The essential thing for me to do in that case is to diversify my portfolio so that I can weather any storms and build towards my passive income dream.

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.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »