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How I’d aim for £1,000 a month in passive income from dividend stocks

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Passive income from dividend stocks could help me live well in retirement. And aiming for £1,000 a month is a decent goal because it would more than double the income I’m likely to receive from the State Pension. Right now, the full amount is Â£185.15 a week. And that works out at just over £802 a month.

How much I’d need to accumulate

But a realistic assumption is that stocks in the future will yield an aggregated 4% in my portfolio. And that means I’d need to have around £300,000 invested in dividend stocks to reap dividends worth £1,000 a month.

In practice, dividends don’t arrive every month. Many companies pay dividends twice a year and, occasionally, we’ll see quarterly shareholder payments. On top of that, from time to time, we could receive special dividends from some businesses in addition to ordinary dividends.

However, dividend payments are never guaranteed from any company. And directors have the full power to trim dividends at any time, or even to cut them completely. And they do sometimes if a business faces operational challenges or tough trading because of difficult economic conditions.

Nevertheless, I think the 4% assumption is a good one. For example, the FTSE All-Share Index yields about that much right now. Sometimes the yield drops a little lower and sometimes it’s a bit higher. So it’s fair to assume an account full of dividend shares in the future could yield at least as much as that index.

How I plan to get there

But there’s still the fundamental challenge of how to get to a portfolio worth £300,000 in the first place. And were I younger, I could start from zero by saving money every month and investing it. My strategy would be to put regular money in dividend-paying shares and high-dividend tracker funds. But I’d roll the dividends back into my investments along the way to make the most of the compounding process.

One of the great things about companies that pay dividends is that they sometimes grow a little each year. So by choosing my long-term investments carefully, I could end up with some stocks backed by powerful wealth-building businesses. However, outcomes like that are never certain because any business can suffer operational setbacks along the way.

My plan would be to diversify between several dividend-paying stocks with the aim of mitigating some of the risks. And I’d also add some index tracker funds, such as one following the FTSE 100. If I select the accumulation version of each fund, the dividends will automatically roll back into my investment. And many share account providers offer an automatic low-cost dividend reinvestment option for individual company shares.

When the time comes to harvest a dividend income it would be easy to switch to the income version of tracker funds and to turn off the dividend reinvestment option on company shares. Then the dividends would accumulate in my share account ready for me to draw the money each month.

The post How I’d aim for £1,000 a month in passive income from dividend stocks appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.