Image source: Getty Images
I love the idea of snapping up dividend shares to provide a passive income. It’s a strategy that millions of investors the world over use — it provides a stable income, as well as offering the chance for further robust portfolio growth. But how much would an ISA user need to make a regular second income of £3,000?
Targeting income
It’s first worth explaining that dividends are never, ever guaranteed. Many companies decide to reinvest the spare cash they make into their operations. This can include developing new products, making acquisitions, and expanding into new markets to drive future growth.
Even dividend shares with strong payout cultures can deliver disappointing returns from time to time. This can be caused by internal factors like management missteps and rising debt, or external issues including economic downturns and regulatory changes.
Yet history shows a well-crafted and diversified dividend portfolio can be a lucrative way to earn money over time.
6% dividend yields
Investing in UK shares in particular can be a great way to earn a long-term passive income. That’s thanks in part to an established culture of dividends, combined with the strong balance sheets of many blue-chip companies.
It also reflects the limited earnings prospects of well-represented sectors like banking, oil, utilities and consumer staples, where income is prioritised by companies over growth.
All this results in the FTSE 100‘s historical dividend yield of 3% to 4%. That’s the highest on the planet. But I think it’s possible to target a higher yield without taking too much risk. I myself look for a yield closer to 6%.
ISA building
Earning a £3,000 monthly passive income means an investor will require £36,000 in dividends each year. Based on a 6% yield, they would need £600,000 sitting in their Stocks and Shares ISA.
That looks like a lot of money on paper. In truth, it is. But the miracle of compounding — where returns build on themselves over time — makes this a very realistic target for committed investors.
Let’s say someone puts £20,000 a year into their ISA, and uses it to buy dividend shares that compound at 6% each year. This would be enough to create that £600k portfolio after just over 17 years.
Finding dividend shares
Phoenix Group (LSE:PHNX) is one such dividend share I think investors should consider. At 683p per share, its forward dividend yield is 8.1%, towering over our 6% target.
As I said, dividends aren’t a sure thing. But there are plenty of reasons I think to expect dividends here to rise over time. The company — which offers retirement, savings and insurance products — generates stunning amounts of cash, giving it the strength to deliver large dividends each year.
Indeed, dividends here have sat above 6% almost every day for the past decade.
Phoenix also operates in a mature industry, meaning it prioritises dividends over reinvesting cash for growth. The FTSE firm faces competitive pressures, while profits can be vulnerable during economic downturns. However, I expect it to remain a lucrative long-term income pick as financial services demand expands.
