If I was planning on living only off passive income, I’d need to build up a sizeable investment pot.
Additionally, I’d need to decide how I was going to invest to reach this objective. After all, there are many ways I could go about it.
But despite the many methods out there, I’ve got one that I consider to be optimal.
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With that in mind, here’s a look at how I’d invest in FTSE 100 dividend shares with an aim to build up my investment portfolio to a point at which I could feasibly live off passive income alone.
UK income stocks have generous dividend yields
The UK’s blue-chip FTSE 100 index is home to several companies that boast juicy dividend yields. Moreover, some of them are even well covered at current levels.
This is always something I look out for, particularly when a company has a higher-than-average yield.
At the end of the day, it’s all well and good for a company to have a high yield, but if it doesn’t have the cash to sustain the current level of dividend payouts, I won’t be receiving as much as I initially thought.
Take Legal & General (8.2% yield), Aviva (7.5% yield), and Imperial Brands (7.9% yield), for example. I’m a hug fan of the fact that each one’s dividend is well covered at 1.6x, 1.5x, and 1.7x respectively.
That said, dividends are never guaranteed. After all, it only takes a sharp and unexpected economic downturn for companies to start reining in cash payouts.
Nevertheless, thanks to my long-term perspective, I should be able to ride out any short-term volatility with relative ease.
Building a £500,000 investment portfolio
Speaking of the long run, let’s look at how long it would take me to reach the required amount in my investment pot.
This is the sum that I’d need in order to start thinking about living only off passive income.
After buying a diversified selection of stocks for my portfolio, including the likes of those I mentioned above, let’s imagine I invest £555 in monthly instalments.
Let’s also say that I initially reinvest all the dividends I receive. After all, this would enabled me to benefit from compound returns, enabling my pot to grow at a faster pace than otherwise.
Assuming I managed to achieve an annualised total return of 8%, then after 25 years I would have a portfolio worth just over £500,000.
But why exactly should I be aiming for half a million?
Living only off passive income
Well, having built up that sizeable investment pot, let’s say I can achieve an average dividend yield of 6.5% on my portfolio.
With a portfolio worth £500,000, this would provide me with around £32,500 in dividend income each year. That figure currently exceeds the average regular UK pay as measured by the ONS (around £31,096).
As such, I’m pretty confident I could live only off the dividend income provided by my portfolio if I reached this milestone.
Consequently, if I was looking to live only off passive income, I’d stick to a strategy of investing in high-quality FTSE 100 dividend shares.
By holding them for the long term, I could massively boost my chances of reaching that all-important £500,000 portfolio.
