Income shares are one of the best ways to build a passive income stream. At least, that’s what I think. It takes little capital to get started, and beyond investing some time in researching and staying informed about the companies within a portfolio, little effort is required to keep the money rolling in.
So let’s go over the main steps to unlocking a secondary income stream from dividends and explore how to get an extra £500 in my pocket each month.
Setting a target
The dates on which dividends are paid are decided by the businesses paying them. But, typically, shareholders can expect to see money rolling in either every quarter, or every six months. Therefore, when setting an income target, it’s easier to work things out on an annual basis.
Since I’m targeting £500 a month, or £6,000 annually in passive income. So how much do I need to achieve this?
The FTSE 100 has historically provided a dividend yield of 4%. Therefore, at this rate, I’d need a portfolio worth roughly £150,000. Needless to say, that’s not pocket change. But by being more selective, achieving a portfolio yield of around 5% without taking on excessive risk shouldn’t be too challenging. That’s especially true in the current climate, where low stock prices have pushed yields higher.
At 5%, I’d need £120,000. That’s still substantial. But by leveraging compounding, it’s possible to hit this goal over time with even a modest monthly contribution.
Building a £120,000 ISA
For British investors, leveraging the tax benefits of a Stocks and Shares ISA is a no-brainer. While only up to £20,000 can be injected each year, any capital gains or, more relevantly, dividends received are tax-free!
Not everyone is fortunate to earn enough to max out their annual ISA allowance. After all, that translates into having £1,667 spare at the end of the month. But having that amount isn’t necessary to reach £120,000 for those with a bit more patience. The time required depends on how much can be spared monthly and what total return they manage to achieve.
To keep things simple, let’s assume a portfolio will match the FTSE 100’s 8% annualised average gain, and it’s starting from scratch.
| Monthly Contribution | Years to reach £120,000 |
|---|---|
| £100 | 27.5 |
| £250 | 18 |
| £500 | 12 |
| £1,000 | 7.5 |
| £1,667 | 5 |
Risk versus reward
For those only capable of allocating £100 each month, waiting almost three decades is less than ideal. However, that doesn’t make the investing journey any less worthwhile, in my eyes. After all, it paves the way to a more comfortable retirement lifestyle, especially for those who start early.
It’s also possible to accelerate this timeline by seeking market-beating returns through intelligent stock picking. This approach comes with added risks and demands far more discipline. But even an extra 2% annualised again could wipe out almost four years’ waiting time.
Of course, the opposite can also happen. A poorly constructed and badly managed stock portfolio can backfire and end up destroying wealth rather than creating it. Risk is an unavoidable reality of investing. But it can be managed with tactics like diversification. And when executed prudently, a long-term investment strategy can be exceptionally lucrative.
That’s why thousands of investors are using The Motley Fool’s Share Advisor wealth-building service to get insights from experts.
