Investing in UK income shares is a tried and tested method for building a handsome second income.
The good news for me is that the FTSE 100 is home to several companies boasting juicy dividend yields. What’s more, some are even well covered by earnings at current levels.
As such, here’s how I’d invest in dividend shares to aim for £50,000 a year in passive income.
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Building an £800,000 portfolio
Building an investment pot big enough to pay out £50,000 a year in passive income is no mean feat.
To achieve something like it I’ll need to build a portfolio worth around £800,000.
Why this much? Well, if I could achieve an average dividend yield of 6.5% on a portfolio of this size, I’d earn £52,000 a year in dividend income.
As someone with decades of working ahead, the positive news is that I’ve got plenty of time to implement a solid strategy that’ll help me reach this goal.
Since my main objective at this stage is to construct a portfolio large enough to enable me to earn a substantial passive income, I’d opt to invest in a diversified basket of growth and income stocks.
This way I can aim to benefit from a combination of share price growth and cash dividends.
Once I’ve bought the stocks for my portfolio, let’s say I invest £570 a month roughly spread across each of them.
Assuming I achieved an annualised return of 8%, I’d have an investment pot worth £802,873 after 30 years.
Playing the long-term game
This brings me nicely onto the importance of being in it for the long term.
If I’m unwilling to stick with it over the decades, it just won’t be possible for me reach my goal.
What’s more, having a long-term perspective will enable me to overcome the inevitable bouts of volatility that plague the stock market.
More importantly, it’ll also allow me to benefit from the miracle of compound returns. Seasoned investors like Warren Buffett know this is the real key to building substantial wealth.
Achieving a 6.5% average yield
Fast forward with me 30 years and let’s assume I managed to reach that £800,000 portfolio. Now I’d just need to earn an average yield of 6.5% from my holdings.
To illustrate, I could do this today by buying shares in companies such as Legal & General (8.3% yield), Glencore (8.1% yield), and Aviva (7.5% yield).
I’d particularly focus on these three since each one’s dividend is covered by earnings. Yields that are well covered by earnings today give management plenty of scope to increase shareholder payouts in future.
That said, I’m aware that no dividend is ever guaranteed. After all, it only takes a period of sustained unstable macroeconomic conditions for companies to begin reining in cash payouts.
As a result, I’d always plan ahead and be aware that my aim to achieve a 6.5% yield could be jeopardised in the short term.
