How much would I need to invest in income shares to earn £400 a month?

Holding income shares is one way I can earn passive income. How much would I need to invest if I wanted to get back a few hundred pounds each month?

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.

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

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.

Are income shares the best way to create a second income? I think so. By holding such shares, I receive dividend payments into my investment account like clockwork. I own a piece of the company, so I get to share in the company’s earnings.

And because I live in the UK, it’s easy for me to buy shares of many excellent income stocks. The FTSE 100 index is full of firms that boast a long history of delivering excellent dividend payments to their shareholders. 

Let’s say I wanted to target £400 a month from my income shares. Here’s how much I’d need.

How much will my shares earn?

The first step in my calculation is to figure out what I’m getting back from my income shares. An easy way to do this is using the annual yield. This is the percentage I get back on my investment over a year. 

So if an income stock has a 3% annual yield, for each pound I invest I’d get back 3p. If I held £1,000 of shares at an annual yield of 3%, I’d receive £30 in dividends yearly. 

The average dividend yield for the FTSE 100 is around 3.5%. That’s probably on the low end though, as it includes growth shares that may not pay dividends as well as income shares. Actually, the total return going back historically for the FTSE 100 is 8%. If we look at the FTSE 250, it’s more like 10%. 

Income stocks, which deliver returns to shareholders in the form of dividends taken out of the company’s earnings, tend to fall somewhere between these figures. A few of the most traded UK stocks are Sainsbury’s with a 5.23% annual yield, Legal & General with its 7.41% yield, and Rio Tinto with its 6.98% yield.

The actual percentage varies, but I’d feel confident I could hit a 6% return. Of course, dividends aren’t guaranteed and it’s common in economic downturns like 2008 for them to be cut entirely. 

Why I prefer to generate a cash return

The £400 per month that I’m aiming adds up to £4,800 a year. So the amount I’d need to invest at a 6% return to generate £4,800 a year would be £80,000. I know people who’ve spent that much on the deposit for a house, but using it to generate a cash return appeals to me more. 

It’s still an amount of money that most people won’t have just lying around. A good strategy to work towards it is to drip-feed savings or disposable income into it. This is something I’ve been doing for years and it’s great to see my total building up over time. 

The trick is to reinvest my dividends along the way, which will grow my investments faster. This is where we see the real magic of compound interest, the “eighth wonder of the world” as some call it.

And once I reach that £400 a month? It’s going to be very tempting to continue to reinvest the returns to get an even higher income from my shares. This can offer me financial stability, a future income alongside my pension, or it could even open the door to retiring early if I so wish.

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.

John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc. 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »