How much would I need to invest in stocks to give up work and live off passive income?

Quitting the nine-to-five grind to live off passive income from dividends sounds like the ultimate dream to many people. But is it possible?

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Every month I invest in FTSE 100 stocks to increase my current or future passive income. I do this because I’d like to reach a point one day when I don’t have to work and can live off the cash dividends received in my portfolio.

But how much do I ultimately need to invest to make that happen?

Lifestyles

Everyone has different financial requirements. If I want to stop working and move to the French Riviera to live it up, then that’s going to need a shedload of money. In that case, maybe I’d be better off buying lottery tickets rather than building a long-term income portfolio!

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In contrast, billionaire investor Warren Buffett is famously frugal. The 92-year-old doesn’t live in a mansion in the Hollywood Hills. He resides in the same modest house in Omaha, Nebraska, which he purchased for $31,500 in 1958.

On his five-minute drive to work in the morning, Buffett usually stops off at McDonald’s. If his stocks are doing well, he’ll splash out on his breakfast, spending an extra couple of dollars. If his stocks are down, then it’s just two sausage patties.

Of course, I don’t have to be that hardcore. But a relatively frugal lifestyle would certainly reduce how much I’d need to invest to eventually live off my portfolio.

How much would I need?

Someone is sitting in the shade today because someone planted a tree a long time ago.

Warren Buffett

According to Statista, the median UK salary for full-time workers last year was £33,000. In London and parts of the South-East, that rises to around £40,000 a year.

But the ongoing cost-of-living crisis has probably increased the amount most people need to live on, so let’s go with that £40k figure.

In this scenario, I’d need an £800,000 portfolio yielding 5% to generate £40,000 per year. But if my requirements were double that, then I’d need at least £1.6m invested in dividend stocks.

I say ‘at least’ because we haven’t factored in any tax payments on dividends. That’s a separate thing to consider.

Getting to £800k

Clearly, not everyone has £800,000 lying around, myself included. So it’s going to take me a few years to build towards such an amount.

How long exactly? Well, again, that depends.

But if I started with £5,000 and invested £175 every week in stocks, it would take me just over 27 years to reach that £800,000 figure. This assumes a compounded 7.5% annual return, which is the average long-term UK market return with dividends reinvested.

However, that amount is an historical average and isn’t guaranteed moving forward. And dividends can be cut or cancelled by companies. But by building a diverse income portfolio I can dramatically reduce the chance of me not receiving any income at all.

My own portfolio contains over 20 income payers. One of my favourites is insurer Legal & General, which currently yields over 8%. I reinvest the dividends to buy even more shares, fueling potentially larger payouts in future.

The London Stock Exchange has literally dozens of quality stocks with 5% yields (and above) right now. It’s a paradise for income hunters. But it also has numerous growth shares that can help propel an investor’s portfolio towards financial freedom.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Ben McPoland has positions in Legal & General Group Plc and McDonald's. 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.

Our best passive income stock ideas

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

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