How much do you need to invest in dividend stocks to target a £1,000 passive income?
Dividend stocks are well known for their passive income-generating capabilities. But like all investments, it takes money to make money. So how much does an investor need to put aside in order to start earning a £1,000 monthly second income stream? Let’s explore.
Crunching the numbers
Determining the amount of capital needed to start seeing an extra £12,000 in the bank from dividends ultimately depends on the yield a portfolio generates. On average, the British stock market has provided a dividend yield of between 3% and 4% when looking at the FTSE 100. And right now, the UK’s flagship index offers around 3.4%.
At this rate, a portfolio would need to be worth around £350,000. Needless to say, that’s a lot of money. And since the median household savings in Britain stand at just £12,500, most people don’t have a spare £350k lying around.
Luckily, stock picking can provide a solution here. Instead of buying a whole index, investors can focus their money on a specific basket of businesses with a long track record of sustaining and expanding dividends.
Taking this more selective approach is riskier. But if executed correctly, it’s possible to craft a winning income portfolio that yields closer to 5%, or potentially even 6%. And if it’s the latter, instead of needing £350,000, investors would only need £200,000.
Reaching £200,000
Moving the goal posts £150,000 closer is a massive step in the right direction. But that still leaves investors with a six-figure problem. Yet hitting this milestone may still be more than achievable in the long run. Rather than investing £200,000 all in one go, investors can drip feed a small amount of capital, say £500, each month into their portfolio.
Pairing these smaller but consistent contributions with a 6% dividend yield with a 4% average capital gain means that even a modest investor could potentially build a £200,000 nest egg in about 15 years when starting from scratch. Of course, the question now becomes, which dividend stocks are worth buying in 2025?
Exploring opportunities
There are several FTSE 100 shares offering a 6% yield today. Among them is real estate investment trust (REIT) LondonMetric Property (LSE:LMP).
The real estate landlord owns a diversified portfolio of commercial properties across the logistics, healthcare, retail, leisure, and entertainment sectors. In recent years, management has been using its size to snap up competitors struggling in a higher interest rate environment to vastly expand and diversify its real estate portfolio. And since rent is a predictable and recurring source of income, the dividend stock has a pretty solid track record, hiking payouts for the last 10 consecutive years.
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That certainly sounds like a promising place to park some capital. However, just like every investment, there are always risks to consider. Close to 40% of its rent comes from just 10 customers, while 60% of its revenue stems from its core logistics properties. This concentration could become problematic in the future should a key tenant decide to pack up operations or the e-commerce sector suffer a cyclical downturn.
Personally, I think the risk’s worth the reward. That’s why I’ve already snapped up some LondonMetric shares. However, one dividend stock doesn’t make a portfolio, and investors will have to find plenty of other dividend stocks to consider to unlock a chunky passive income.
The post How much do you need to invest in dividend stocks to target a £1,000 passive income? appeared first on The Motley Fool UK.
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Zaven Boyrazian has positions in LondonMetric Property Plc. The Motley Fool UK has recommended LondonMetric Property Plc. 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.
