See how much an investor needs in a SIPP to earn passive income of £777 a month
My primary goal when investing is to generate passive income from dividend stocks, but I’m not taking a penny of it today. Every coin goes straight back into my Self-Invested Personal Pension (SIPP) to build wealth for my future.
When I finally retire, I will use that to generate a regular second income, on top of my State Pension. Ideally, without having to sell shares or draw down the pot.
To target a nice round figure like £777 a month, which adds up to a meaty £9,324 a year, I’d need to crunch some numbers. The 4% rule is a common starting point. It suggests that withdrawing that percentage of pension each year should avoid depleting the pot. Based on that, I’d need a pot of £233,100 to generate my target income.
Regular returns
That’s a decent sum, but not out of reach. I could generate a similar income from a smaller pot, if I focus on high-yielding FTSE 100 stocks like Legal & General Group (LSE: LGEN). Its shares are showing signs of life after years in the doldrums, climbing 12% in the last year. But the yield’s the main attraction here.
Today, it’s 8% on a trailing basis. Over the last year, my total return’s close to 20%. I’m happy with that. There’s still a long way to go.
Latest results, published on 6 March, showed core operating profits up a solid 6% to £1.62bn, while the board announced plans to return more than £5bn to shareholders over three years. That includes a £500m share buyback for 2025, following a £200m programme last year.
Earnings volatility
Legal & General also increased its final dividend to 15.36p, taking the full-year payout to 21.36p, up 5%. While increases are expected to slow to 2% a year between 2025 and 2027, that feels reasonable given that generous yield.
It’s been a bumpy few years though. Earnings per share have fallen 62%, 43% and 61% over the last three years. That’s lifted the price-to-earnings ratio to an eye-watering 88. That doesn’t look cheap, but investors could still consider buying the stock today. That’s because the dividend appears well-supported and the income can be reinvested while we wait for sentiment and the share price to pick up.
No stock is risk-free. Legal & General remains sensitive to market swings, its asset management division has faced margin pressure, and its fortunes are closely tied to UK economic sentiment. Those are things to keep in mind.
Back to the passive income goal. If I could build a portfolio yielding 5.5% on average, I’d only need around £169,527 in my SIPP to generate that £9,324 annual income. That’s a lot less than the £233,100 required using the 4% rule.
Compounding growth
Investing’s a long game. Getting to that £169,527 target would take time, but with consistency it’s achievable. Let’s say an investor was starting from scratch, with 30 years before retirement. Investing £150 a month would give them £182,000 over that timescale. This assumes average annual growth of 7% a year, roughly the long-term FTSE 100 average.
There will be ups and downs along the way. Dividends can be cut, and share prices do fall. But with a well-diversified income portfolio, I think this is a realistic goal.
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Harvey Jones has positions in Legal & General Group Plc. 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.
