How much does someone need to put in the stock market to retire and live off passive income?

Ever wondered what it might take to stop working and live off the dividend income from stock market investment? There are all sorts of questions that someone needs to answer to get a realistic idea of what that might look like in practice. One is how big such a portfolio needs to be.

Dividend income’s a function of investment size and yield

We may equally ask how long is a piece of string. After all, different people each have their own idea about how much money they would target as an annual income.

But let’s say that someone aims to earn £39k a year. I use that figure because that is roughly the median gross annual income for full-time employees who have been in their jobs for at least a year, according to the most recent annual data from the Office of National Statistics.

Let’s further assume that the aim is to earn that amount a year purely from dividends, without drawing down any of the capital in the portfolio.

How big the portfolio needs to be to hit that annual passive income target will depend on what dividend yield is achieved. At the current FTSE 100 yield of 3.2%, it will take a portfolio of £1.2m. With a 5% yield, that number falls to £780k. At a 7% yield it would be down to (a still substantial) £557k.

Taking a long-term approach

I do think a 7% yield is achievable in today’s market. But to make things less stretching, I will use the 5% figure.

The £780k could be a lump sum in a share-dealing account for example.

Few people have such a large sum lying around though. So what would it take if starting from zero, putting £20k a year into a Stocks and Shares ISA, then compounding it at 5% annually? In that case, the £780k target would be hit after 23 years.

Yes, that is a long time. But if someone started at 35, for example, that would mean they could hit their goal to stop working at 58. That is close to a decade before the State Pension age.

Building the right portfolio

While I think compounding at 5% annually and, later, targetting a 5% dividend yield is realistic, that does not make it easy.

It is important to think carefully about how to diversify across different shares, which ones to buy and how to minimise the effect of fees and charges on investment returns.

One share I think investors should consider both for its growth and income prospects is meat processor Cranswick (LSE: CWK). That might seem odd. After all, it only yields 2%. However, over the past five years, the share price has grown 44%. So Cranswick has comfortably beaten my 5% compound annual growth target during that period.

Of course, past performance is not necessarily an indicator of what a share price may do in future. Dividends are also never guaranteed, despite Cranswicks’s decades-long streak of annual growth in its dividend per share.

One risk I see is allegations of poor conditions at its pig farms causing reputational damage. But with long industry expertise, economies of scale, relationships with many of the UK’s leading grocery chains and a proven business model, I am upbeat about the outlook for Cranswick.

The post How much does someone need to put in the stock market to retire and live off passive income? appeared first on The Motley Fool UK.

More reading

• What would a 40-year-old need to put into an empty SIPP to target monthly passive income of £1,000?

C Ruane has no position in any of the shares mentioned. 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.

See author's posts