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I regularly invest my savings into shares on the stock market to build a passive income stream. The long-term goal is to retire early and live off the dividend income from a portfolio of stocks.
But how easy is that goal and how much would someone need to invest to achieve it? Let’s crunch the numbers and find out.
How much?
Each individual has different expenses based on their location, lifestyle and dependants. Those accustomed to a high-flying lifestyle would naturally need more money than those happy with the basics, so it’s best to work with averages.
The average annual salary for full-time British workers is around £35,000. However, due to inflation, this won’t amount to much by the time retirement rolls around. A better figure to aim for is at least £50,000 a year for sufficient income.
Estimating time scales
To bring in £50k would require a £714k portfolio of dividend stocks yielding 7% a year. That’s quite a lot so it’ll need to be built up over time. How long that takes depends on how much is contributed every month. Fortunately, reinvesting dividends and compounding the returns can speed things up.
With an initial investment of £10,000 and contributions of £500 each month, it would take around 28 years. That assumes the portfolio achieves the 8% historical average return for UK stocks. But £500 is a lot to save every month. If it were only £300, it would take around 33 years. For younger investors, this would still be more than enough time before retirement.
Investing for passive income with dividends requires some careful balancing of stocks. To avoid losses from industry-specific risks, it pays to invest in a diverse range of stocks (retail, energy, finance, etc).
Dividends and diversity
Some popular UK dividend stocks to consider include Vodafone, Legal & General and British American Tobacco, all with yields upward of 7%. However, a lesser-known stock I like the look of currently is TP ICAP (LSE: ICAP). This FTSE 250 financial services company has offices around the world, trading assets and providing intermediary services between global businesses.
For several years before the pandemic forced a cut, it was paying 15p per share. Now it’s finally recovered to this level and looks set to keep delivering solid dividend value to shareholders. The yield has dropped from 7.3% to 5.7% over the past year, while the share price has risen 45.8% in the same period.
But the share price is quite volatile which is a risk to consider. During the pandemic, it fell from 404p to an all-time low near 100p. Now with the economy strengthening, it’s recovered 143%. These fluctuations reveal its sensitivity to global markets and exemplify why diversification’s so important.
If high inflation returns it could lead to a drop in trading volume and more losses for the company.
TP ICAP’s just one of many dividend shares to consider for a passive income portfolio. When combined with a range of high-yielding dividend stocks, the portfolio could achieve a 7% average yield.
