Building up passive income should eventually give me more freedom around how I spend my time. That’s because the extra income I receive will mean that I get to choose whether I work more hours to fund my lifestyle.
Here, I’m going to outline my 10-year plan to build up a sizeable passive income stream from dividends.
When people talk about “earning money as you sleep,” they’re referring to passive income. This is obviously the opposite of active income, which involves me being paid for the work I do.
Today, the internet enables various ways of generating extra income streams, including dropshipping and affiliate marketing.
But is such income really passive?
I mean, affiliate marketing will involve building, updating, and optimising my site(s) to keep it/them ranking high on search pages. There will be marketing agencies representing companies that my site is affiliated with, and these might want me to regularly refresh my promotional content.
Hmm, that sounds more like a second job to me.
But when I invest in dividend stocks, I’m being paid to simply holding them. I don’t have to update anything. Cash flows into my brokerage account while I’m going about my day-to-day life. Therefore, dividend investing is truly passive.
Better still, if I pick the right stocks, they could also gain in value over time without me lifting a finger. For example, McDonald’s has increased its annual dividend for 47 consecutive years now. And its share price has exploded higher too.
So, with this stock, there has been rising income and capital growth. A win-win combination!
Boiled down, my plan has just three elements:
- Save money to invest every month
- Invest in top-notch dividend stocks carrying high yields
- Reinvest the dividends to buy even more shares
First, like clockwork every month, I need to put money in my Stocks and Shares ISA. This means that any dividends and gains I generate will be tax-free.
Ideally then, I’d like to max out the £20k contribution limit every year, though this will depend upon my circumstances. But my commitment to do so is there, even if I have to make sacrifices along the way. I’m playing the long game here, after all.
Second, I’m going to invest in high-quality businesses. That means they have strong competitive positions and resilient cash flows to pay dividends to shareholders. And I’m looking for firms without too much debt on the balance sheet, especially now that interest rates have risen sharply.
Ultimately, no single dividend is guaranteed. But by filtering for companies with the desirable qualities above, I’m giving myself the best chance of success.
My target dividend yield range is 5%-9%. Fortunately, due to low share prices caused by poor investor sentiment, the UK market today has an abundance of such high-yield stocks.
Finally, I’ll be reinvesting my cash dividends instead of spending them. This way I get more shares that pay more dividends, and so on. This will supercharge the affects of compound interest.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Enjoying the rewards
Now, my passive income plan is the opposite of a get-rich-quick scheme. For that, I’d be better off ploughing all my money into lottery tickets or obscure cryptocurrencies. But I’d rather not lose all my money taking such risks.
So, how much passive income could I be enjoying after 10 years?
Well, assuming I invest my full ISA allowance of £20,000 a year and generate a 7.5% annualised return, then I’d end up with about £292,550 (excluding any platform fees).
From this 7.5%-yielding portfolio, I’d hope to receive around £22k a year in tax-free passive income. This goal is why I invest every month.