For investors looking to earn a reliable passive income, UK dividend shares represent a compelling and well-established avenue. After all, the FTSE 100 index is home to a range of companies with attractive yields.
Time after time, these companies have demonstrated their commitment to distributing profits to shareholders. This makes them attractive targets for income-seeking investors.
Building a sizeable investment portfolio
But to earn a substantial amount of passive income each month in the form of dividend payments, I’d first require a big enough investment portfolio. For the purposes of this experiment, I’m putting that figure at £100,000.
To reach this goal, I’ll have to exercise dedication and discipline. More importantly, I’ll need to come up with an appropriate investment strategy, for which I see two primary options.
Either I can start with growth stocks to target capital appreciation and transition to dividend shares later. Or alternatively, I can focus on income stocks from the beginning and reinvest my dividends to help grow the pot.
Either way, by investing early and making regular contributions my aim is to harness from the power of compounding returns to build a sizeable portfolio. For instance, if I invested £600 a month and achieved an average return of 8%, I’d have a portfolio worth around £108,000 after 10 years.
It’s worth noting that there’s no guarantee I could achieve an average return of 8% over an extended period. But with that said, embracing a long-term mindset will help me ride out the inevitable periods of market volatility.
Striving for a 7.5% average yield
Now, to earn in and around £625 a month in passive income on my hypothetical £100,000 portfolio, I’d need to achieve a 7.5% average yield.
First and foremost, this won’t be straightforward. In any case, there are several risks inherent in buying high-yield stocks. To illustrate, companies with exceptionally high dividend yields may not always be sustainable.
After all, those facing financial difficulties have been known to cut or suspend dividend payments. This can ultimately lead to a loss of income for investors.
Nonetheless, there are steps I can take to mitigate this risk. For example, I could focus only on companies whose yields are adequately covered by their earnings.
Dividend shares I’d buy today
At the top of my watchlist are Legal & General (8.7% yield), British American Tobacco (8.4% yield), Rio Tinto (7.8% yield), Aviva (7.9% yield), Glencore (7.6% yield), and National Grid (5.7% yield).
Together, these six companies form a diversified selection and have an average combined yield of around 7.6%. What’s more, some such as Legal & General are well-established giants in their sectors, renowned for their longevity, financial stability, and strong track record of consistently delivering returns to shareholders.
To put all of this into perspective, if I had constructed a £100,000 portfolio that was now evenly distributed among these companies, it would translate into just over £625 in dividend income each month, showcasing the potential of dividend shares to generate a reliable stream of passive income.
