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Let’s be real. £2,000 a month in passive income is a nice chunk of change. In my opinion, one of the best ways to earn passive income is from dividends.
But how much would an investor realistically need to save to earn £24k a year? Well, that depends. If the investor wanted to start earning this passive income immediately, then my trusty calculator tells me they would require a £600,000 pot.
But hold on a minute. £600k?! Now that’s a hefty chunk not typically found down the back of a sofa.
Passive income tricks from dividends
Thankfully there is a smarter way to earn a substantial passive income. And it involves investing a lot less hard-earned money.
So what’s the catch? Well, the trade-off is that the investor will need to wait a bit. Delayed gratification, but one that I think is worth the wait.
There are some nifty tricks that allow investors to invest less money if they’re prepared to wait 10-15 years.
For instance, reinvesting dividends can boost investments over time through the power of compounding. Dividend cash buys more shares, which generates more dividends, which buys more shares. And so on. This snowball effect is a powerful way to accelerate investment growth.
Secondly, for the same reason, adding fresh money every year can also have an outsized impact on the final investment income.
Dividends that shine
There are plenty of FTSE 100 shares that have a long history of paying reliable dividends.
Enter National Grid (LSE:NG.), the company that keeps the lights on for the entire country. It has reliably paid dividends to shareholders every year for over 30 years. And in around 80% of those years, it managed to raise its dividend payment.
Right now, it offers a 4.2% dividend yield, and has committed to inflation-linked increases over the coming years.
National Grid not only offers an above-average dividend yield, but also reliable dividend growth. Of course, nothing is risk-free though. The government could decide to get involved in the electricity business, or Ofgem could slash allowed returns. Either could impact dividends in the future so it pays to keep an eye open.
Crunching the numbers
Using my trusty calculator again, I’ve crunched some numbers to show how an investor could earn £2k a month in passive income. Here’s the plan:
- Start with £50,000 invested in National Grid shares
- Buy £6,400 of more shares every year.
- Reinvest the dividends every year to buy more shares.
Assume the annual dividends keep growing by 5% a year, which has roughly been the case historically. And assume the share price doesn’t grow, just to be conservative.
After 15 years, they should have around 24500 shares, by which point it should produce 98p per share in dividends. That equates to over £24k a year.
In total they would be investing £146,000 over that period. But it sure is a far cry from £600k!
So, there you have it: regular investments, a bit of patience, and an extremely dull company could be enough to wave goodbye to the 9-to-5. If you prefer something a little less dull, there are plenty more fish in the Footsie.
