How I’d invest £175 a month to target £12,000 of annual passive income for life


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Earning an income without working sounds like a good idea – but is it practical? I think you can, depending on what passive income idea you use.

I am trying to earn extra income by investing in dividend stocks. Here’s how I used that approach to try and build a £1,000 monthly income, which adds up to £12,000 every year.

Targeting £12,000 annual passive income

How much do I need to invest to try and hit my target?

It depends on the average dividend yield of the shares I bought. The dividend yield is the money I expect to earn annually from the stock expressed as a percentage of what I paid for it. Right now, I think I can realistically aim for an average yield of 6% while limiting my purchases to blue-chip companies. Indeed, some dividend stocks I have in my ISA Stocks and Stocks, such as M&G and British American Tobacco, currently offering a yield of 6% or more.

At that rate, to earn £12,000 in passive income every year I would need to have an investment pot of £200,000. Saving at the rate of £175 a month, it will take 95 years!

But can I speed it up? I think so. Simply by reinvesting my dividends instead of taking them out as cash every year, I should reach £200,000 in 33 years. It was because of the compounding principle.

Thirty-three years is still a long time. But that’s not far from 94 years old! However, if it takes me 33 years to reach my target, the sooner I start the better.

Choosing UK stocks to buy

In the example above, I assume that the stock price and dividends are constant. In practice that is not possible. They could go down – but they might as well move up, helping me reach my target early.

However, these passive income plans will likely take decades. So I had to choose stocks with a long term investor mindset. I’m not just looking for stocks in businesses that are performing well at the moment. I will try to buy stock in a company that I hope will do well for decades to come.

No one knows what the future holds even for a well-run company, which is why I will be diversifying my portfolio across different stocks. Nonetheless, some companies are likely to benefit from their own long-term demand and pricing strength, in my opinion. As an example, Unilever and Law & General are two companies I would consider having in my portfolio on that basis. Indeed, I have purchased Unilever shares and receive passive income from them every quarter.

Lifetime income

Putting this plan into action to achieve my goals could of course take some time. Then again, I think it’s totally worth it. The extra thousand pounds each month in passive income will definitely come in handy as you get older.

If the company I invest in continues to pay dividends, my income stream will continue for as long as I hold the stock – potentially for the rest of my life. I would try to find businesses with strong profit growth prospects that could increase their dividends. That way, I can actually find that over time, my annual passive income is getting higher and higher.