Building a passive income portfolio is a key objective for many investors. Whether it’s to help them retire early or just to make life more comfortable, who doesn’t want some extra pounds in their pocket?
Investing in dividend shares is a popular way to make this a reality. In fact, it’s my preferred approach. Using the power of compound returns, it’s possible to build a sizeable dividend portfolio by investing small amounts regularly.
Here’s how I’d target dividend income from the stock market with only £100 a month.
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Saving regularly
First, I need to save some cash. Admittedly, times are tough as inflation remains stubbornly high. This puts pressure on all of our wallets.
However, a target of £100 per month equates to £3.29 a day. Whether that means sacrificing a daily coffee or cycling to work, I feel this is a manageable goal. After a year, this would produce £1,200 in total savings — that’s a decent sum to invest.
Investing in dividend stocks
Next, I’d look for high-quality dividend stocks. Admittedly, any company can cut or suspend its dividend for a variety of reasons. That’s why I carefully research shares before investing and diversify my positions across multiple companies and sectors. In doing so, I’m maximising my chances of securing reliable passive income streams.
The FTSE 100 index sports a 3.53% dividend yield. I’d try to beat this with some careful stock picks. Caution is required here, as big share price falls can push yields to unsustainably high levels. This is why I prefer to invest in firms with solid dividend track records spanning many years.
Examples of my existing holdings include cigarette manufacturer British American Tobacco and pharmaceutical giant GSK. These companies yield 7.06% and 6% respectively. Their dividends aren’t guaranteed, but they’ve been reliable passive income generators historically.
Compound returns
Let’s imagine I secured a 6.5% annual yield on my portfolio. If I reinvested my dividends and continued to save and invest £100 per month, I could set a compounding snowball into motion.
To illustrate the point, here are the numbers based on those assumptions.
| Time | Portfolio value |
|---|---|
| 1 year | £1,242 |
| 5 years | £7,072 |
| 10 years | £16,763 |
| 20 years | £48,230 |
| 30 years | £107,299 |
By saving as little as £100 per month, I’d finish with a portfolio valued over £100k after 30 years. Importantly, these calculations assume no share price growth or losses, which would affect the final results.
Nonetheless, in this example my portfolio eventually produces a handy £6,974 in annual passive income at a 6.5% yield.
Risks and rewards
Investing in stocks carries risks. My shareholdings could underperform, which would delay my progress. Even worse, a major stock market crash could decimate my portfolio and my passive income streams might potentially dry up. If this happened, I’d try to embrace the volatility and hold — no matter how painful in the short term.
Taking a more optimistic view, there’s also the potential for significant rewards. For instance, my returns could be stronger than expected, boosted by share price appreciation.
In that scenario, the compounding effect is even more pronounced. I’d be on my way to building a passive income empire for the price of a coffee a day.
