Retiring early with a nice big passive income stream is only for those with tons of cash to invest, isn’t it?
Well, no. It’s surprising how much we could accumulate through modest regular investments in UK shares. The main key for me is to find stocks with long track records of generating healthy cash flow, and using that to pay good dividends.
Today, I want to look at how much income I might be able to build from buying British American Tobacco (LSE: BATS) shares.
Huge yield
Right now, forecasts put the dividend yield at a whopping 10%. That means anyone who’s managed to build a £100,000 pot of British American Tobacco shares could already be enjoying a cool £10k a year in dividend cash.
And we could build up that much in a lot less time than we might imagine. Someone who could invest £500 a month in the stock could reach that goal in just 10 years.
Even just £250 a month could still get us there in 15 years. It’s not twice as long, because of the way the early years compound up.
Compounding
The secret is to reinvest each year’s dividends into new shares. Each year we get to buy 10% more shares… even before we add the next year’s monthly savings.
So £250 a month would build to £3,000 in shares in my first year. But then next year, I could use my 10% dividend to get me up to £3,300, even before adding a penny more in new cash.
Then another £3,000 in the second year gets me to £6,300. Then add another £630 from dividends… it keeps on growing, by more and more every year.
Risky stock
This has to be a risky investment though, doesn’t it? I mean, the tobacco business is doomed to end some day, right?
Well yes, that’s the main risk. And it can’t be dismissed. But British American Tobacco is building its alternative product lines quite strongly. And while we wait for that to grow, there’s a huge portion of the world where cigarettes are still additively big business.
Tobacco also raises a lot of tax. So I expect governments want to see these new ways of consuming succeed, rather than killing the golden goose.
I still wouldn’t put all my cash in one stock though. No, diversification is key, and I’d want to build a Stocks and Shares ISA of at least 10 different stocks.
£500 passive income
So what about the £500 a month income I spoke of? Well, just 12 years of putting £250 a month into British American shares could do it. This is with the share price and dividend staying the same. But that’s not going to happen in reality. Share prices and dividends will vary.
So I’d build a selection of dividend stocks, and be sure I’m happy with the risk of each one. And over the years — maybe not too many — I reckon it could build me a nice income stream.
