It’s the start of March, but I still have just about 10 months left to make a mark on 2022. In one specific regard, I’m trying to target £500 in passive income. Even though I can use different assets to make passive income, the one I want to focus on is dividends from listed companies. With that as my aim, here’s how I’m going about making it a reality.
Two factors to consider first
Firstly, I need to evaluate how much money I have to invest. Unfortunately, my plan is going to be dead in the water if I only have a few hundred pounds. Logically, I need to have very much more than £500 to invest in order to make £500 back from passive income this year.
Although it’s preferable if I can invest in one go, I’m also happy to invest a chunk each month for the first few months. This makes it a little easier on my cash flow in the short term. However, given that I want to avoid missing out on as many dividend payment dates as possible, I don’t want to wait too long in this regard.
The other main factor I need to consider is what dividend yield I want to target. At the moment the average FTSE 100 yield sits at 3.57%, with a range of companies offering generous yields above this. Four stocks are even offering a yield in excess of 10%.
As a general rule of thumb, the higher the yield the more risky the stock is. An example of this is Evraz, a mining company with operations in Russia and Russian significant shareholders. The share price has been plummeting recently, pushing the dividend yield above 50%. On the face of it this yield might seem attractive, but when I understand the reasons behind it, it’ll likely cause me to think carefully.
Adding the numbers for passive income
Once I’m happy with the two above points, I can start to add in the numbers. I’m going to assume that my target yield for passive income is 7%. As this is an annualised yield, I’m going to increase this to account for the two months (out of 12) that I’ve missed this year. This means that I actually need a yield of 8.16%.
With a target of £500 in passive income, this would mean that I’d need to invest £6,128 now. Alternatively, I could split this up into a couple of payments over the space of a month or so. But I would struggle to invest monthly through to the end of the year, as my monthly investments in November and December would be unlikely to make me any income this year.
However, what the above shows is that it’s possible to start building a passive income portfolio straight away, and enjoy the benefits in a relatively short period of time. I should note that the dividend payment dates vary from business to business. Some pay quarterly, some annually. So the £500 is unlikely to be spread evenly each month.
If I don’t have the lump sum available or spread in the next few months, I can still start anyway with what I can afford. After all, dividends should be paid each year. So even if I can’t reach my goal in 2022, it’ll be a lot easier to hit in 2023, given my existing investments.
