Mark is a freelance writer with a background in financial technology. He developed his interest in finance while working as a systems analyst for one of the largest interdealer brokers in London. He is enthusiastic about emerging industries like fintech, biotech, AI, and renewable energy.
Latest posts by Mark David Hartley (see all)
1 high-growth FTSE 250 stock that I’d buy and hold for years - 1 May, 2024
UK stock markets take off! The FTSE 100 is beating major global indexes, but who’s leading the pack? - 30 April, 2024
Down 20% this month, can this struggling FTSE 100 stock recover? - 30 April, 2024
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While there are many different ways to earn passive income, one of the most popular ways is by investing in shares. Shares in reliable companies can provide returns in the form of both price appreciation and dividend payments.
Benefiting from dividends
Dividend-paying shares are those in companies that pay their investors a small percentage of their profits each year. Unfortunately, dividend yields are usually quite small – typically between 2 to 8%. Consequently, earning a meaningful passive income from dividend shares requires quite a large investment.
Those who haven’t won the lottery or received a healthy inheritance will need to save up. Luckily, the magic of compound returns helps to make this easier. A large investment can be built up over time with small monthly contributions.
Crunching the numbers
Dividend yields fluctuate regularly and differ from company to company, so it’s difficult to say exactly how many FTSE 100 shares I’d need for £1,000 of passive income a month. However, I can use historical data to estimate how many dividend-paying shares on average could achieve that amount.
Let’s consider a few stocks as an example.
The telecoms giant
Vodafone Group (LSE:VOD) pays an exceptionally high dividend yield of 11.5%. This is almost double the average FTSE 100 dividend yield of around 6%. At first glance, I might consider this a good addition to a dividend-paying portfolio.
But a high dividend yield alone is no guarantee of returns.
Companies can choose not to pay their annual dividends at any time. If annual earnings are lower than expected, a company is likely to withhold a dividend for that year.
In the case of Vodafone, earnings are expected to decline by an average of 51% over the next three years. I believe this could reduce the chances of dividends being paid.
The biotech innovator
AstraZeneca (LSE:AZN), by comparison, has a much smaller dividend yield of 2.2%. However, the company has an excellent track record of paying dividends. Its next dividend of 156p per share is due in about a month.
AstraZeneca is also estimated to be trading below fair value, by around 32%. But unlike Vodafone, earnings are forecast to grow by 16% per year going forward.
Checking forecasts from analysts, it looks like the majority agree that the share price will increase by an average of 26% in the next 12 months.
I think this makes AstraZeneca a more reliable addition to my portfolio of dividend-paying shares.
So how many do I need?
With an average yield of 6%, I would need about £195,600 worth of shares to earn £1,000 a month. Since I don’t have that much, I’d need to save up this amount over some time.
Let’s say I begin by buying 10,000 shares in various companies at an average price of £10 each.
I then commit to buy a further £350 worth of shares each month.
I would estimate I can achieve a 5% annual return (a fairly conservative average for the FTSE 100).
By adopting a dividend reinvestment plan (DRIP) to compound my gains and estimating a 1% annual dividend increase, I could reach my goal in just over 23 years.
At that point, I would have bought approximately 19,660 shares at an average price of £10.
To have a perfect portfolio to generate $1000/month in dividends, one should have at least 30 stocks in at least 10 different sectors. No stock should not be more than 3.33% of your portfolio. If each stock generates around $400 in dividend income per year, 30 of each will generate $12,000 a year or $1000/month.
How is the FTSE 100 calculated? The FTSE 100 is calculated by weighing all stocks listed on the London Stock Exchange by market capitalisation. The 100 companies with the highest market caps make it into index.
In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
One of the easiest passive income strategies is dividend investing. By purchasing stocks that pay regular dividends, you can earn $2,500 per month in dividend income. Here's a realistic example: Invest $300,000 into a diversified portfolio of dividend stocks.
In 2022 amid the shock and awe of rapidly rising interest rates, the FTSE 100 secured a flat performance over the year even as most other world markets plunged. That's not, however, why most investors buy shares. They want growth or a growing income or both and returns that beat other asset classes over time.
FTSE 100 companies are typically stable thanks to their size and reputation – but they're not immune from downturns. So it's always wise to spread your risk. You can buy FTSE 100 shares using InvestDirect, our share deaing platform. Fees and eligibility criteria apply.
The "FTSE" is the Financial Times Stock Exchange in the U.K. that is a provider of different indices, its most popular being the FTSE 100, which tracks the top 100 companies by market cap in the U.K. The U.S. version of this would be the S&P 500, which tracks the top 500 U.S. companies by market cap, or the Dow Jones ...
Yes, American investors can invest in the FTSE 100. The best way to do this is to invest in exchange-traded funds. There are funds that focus on replicating, tracking, and shorting the companies of the index. Examples include iShares Core FTSE 100 UCITS, Vanguard FTSE 100 UCITS, and HSBC FTSE 100 UCITS.
The FTSE 100 has gone on another burst higher in recent minutes, approaching its all-time intraday high, set yesterday morning. Led by HSBC's gains, which have increased as the morning has gone on, the blue-chip index is up 43 points to top 8,190 for the first time ever.
As Benzinga explained, to calculate your estimated investment value you need two variables: your desired annual earnings target ($12,000) and the dividend yield of the stock (0.73%). Here's the formula: $12,000 / 0.0073 = $1,643,835.62 to generate an income of $1,000 per month.
To generate $500 a month, you might need to build your investments to $150,000. Taking out 4% each year would amount to $6,000, which comes to $500 a month.
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
If you were to invest in a company offering a 4% annual dividend yield, you would need to invest about $900,000 to generate a monthly income of $3000. While this might seem like a hefty sum, remember that this investment isn't just generating income—it's also likely to appreciate over time.
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