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How much should I invest to target a £10,000 dividend income?

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Lots of people spend time and energy coming up with passive income ideas. But I like what I see as the straightforward approach of generating dividend income by buying blue-chip shares.

Such income is never guaranteed and I am careful in selecting the shares I buy. If I wanted to set about targeting a £10,000 annual stream of dividends, here is how I would go about it.

High yield versus high quality

Some shares offer small dividend yields, others have medium ones and a few seem to bring very high yields.

A common investor mistake is buying dividend shares for their high yields without understanding how sustainable the payouts are likely to be.

That can lead to a double whammy. A company cuts the dividend and its share price falls in response. Not only could that hurt my dividend income, it might also mean my shares are worth less than I paid for them.

That is why I always focus on buying shares in high-quality companies at attractive prices. If they also have a high yield, that could be good for my dividend income. But I try never to let the tail wag the dog.

Targeting £10,000

However, that order of priorities does not mean yield is unimportant. It is critical in calculating how much I would need to invest to try and hit an annual dividend income target.

For example, if I invest at an average yield of 5%, that goal would require me to invest £200,000. A 7% average yield would take nearly £143,000. If I managed to achieve an 8% average yield, I could earn £10,000 in dividend income each year with an investment fund of £125,000.

Drip-feeding funds

But what if I do not have that sort of money to spare? I could build up to my target gradually. For example, if I invested £200 each month at an average yield of 7%, after a year I ought to have a portfolio generating almost £170 in annual dividend income.

At that level of monthly contribution, I should hit my £10,000 annual target after around 59 years. That is a very long time to wait, although I could be earning growing dividend income along the way as my investment pot increased.

An alternative would be reinvesting those dividends, something known as compounding. If I compound annually at an average yield of 7%, investing £200 per month could let me hit my £10,000 yearly dividend income target after 24 years.

Selecting shares with dividend income potential

Some of the high-yield blue-chip shares in my portfolio such as British American Tobacco and M&G actually have yields higher than 7% right now. If I kept investing in a diversified portfolio of shares with those sorts of returns, I could potentially turn a monthly £200 investment into £10,000 of annual dividend income even faster.

But, crucially, I would also focus first on finding companies with strong business models and solid finances I thought looked likely to maintain or increase their dividends in future.

The post How much should I invest to target a £10,000 dividend income? appeared first on The Motley Fool UK.

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C Ruane has positions in British American Tobacco P.l.c. and M&g Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.