I don’t know anyone who wouldn’t want a reliable stream of passive income to supplement their regular wage.
I mean, speaking personally, I sure do love to see cash dividends flowing into my account without me having to work for it. That’s the passive element of the whole process. And it’s possible that the income could one day grow large enough for me to stop working entirely.
Sadly, I’m getting ahead of myself here! Before I can think about that, I’m going to need to do some upfront work. And that will involve saving cash to put towards building a solid and reliable income portfolio in a Stocks and Shares ISA.
The good news is that once I’ve found the right UK dividend shares, they’ll do all the heavy lifting for me.
Using FTSE 100 shares to build up a portfolio
So, how much passive income could I expect to generate from £500 a month?
Well, that depends on two factors, which are how long I invest for and what kind of return I’m able to achieve.
For the purpose of this article, I’m going to assume that I invest for 25 years and achieve an average 9% annual return from my portfolio. It’s not guaranteed that I can generate that level of return, but I’m encouraged that many investors consistently do so.
Importantly, I’ll have the added benefit of regular monthly investing, which means by default that I’m often going to be buying when stocks are down. That means I’ll be buying them cheaper, with higher dividend yields, ideally boosting my overall returns.
The best chance of me actually succeeding will be through constructing a diversified portfolio of dividend stocks. That would defend against any one or two disappointing stocks ruining my overall returns.
Right now, many FTSE 100 stocks are trading on dirt-cheap valuations with high dividend yields. That means I can hope to lock in some meaty 6%-9% yields.
Solid candidates
Which shares should I buy this year to get the passive income ball rolling then?
Well, my favourite dividend stock right now is probably life insurance and pensions giant Legal & General. Its full-year dividend is currently 19.4p per share. With a share price of 214p today, that translates into a yield of 9%.
Better still, that payout is forecast to soon rise to 20.3p per share. That is what management is guiding for. If so, investing today would lock in an inflation-busting 9.4% dividend yield.
I’d look to supplement this with a few lower yields. Perhaps National Grid, the company that operates an effective monopoly on the transmission of energy in the UK. That stock has a forward yield of 6%.
How much passive income could £500 a month get me?
Now, the key to building a large sum that generates attractive passive income is to reinvest my dividends.
Doing so, I will fully maximise the power of compound returns. And after 25 years of monthly investments of £500, my portfolio would have grown to just under £530,000.
From this, I could hope to generate approximately £47,500 in annual passive income by deciding to receive my cash dividends rather than reinvesting them.
The ingredients for success here would be patience and discipline.
