Monday, December 23, 2024

£4,000 to invest? Here’s how I’d aim to turn that into a £100 monthly passive income

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I buy FTSE 100 dividend shares to generate a passive income to top up my State Pension when I retire. Whenever I have a bit of cash to spare, I invest it in blue-chip UK stocks. I’ve been doing it for years. My only regret is I didn’t start even earlier.

Luckily, investing in shares doesn’t require a huge sum of money upfront. It’s possible to get cracking with as little as £500, or even less for a newbie investor who wants to get the hang of how it works.

Buying individual company stocks is riskier than simply putting money into a savings account. Yet in the longer run, it should be more rewarding.

Chasing dividends for life

Investors don’t just make money when share prices rise. Many companies pay regular dividends on top, as a reward for holding their stock. Better still, most aim to increase these dividends, year after year, as profits increase. This gives investors a potential rising income, although there are no guarantees.

FTSE 100 companies who increase or maintain dividends for at least seven consecutive years are known as Dividend Aristocrats. FTSE 100 information and analytics firm RELX (LSE: REL) is one of them. It has hiked shareholder payout for each of the last 13 years.

The RELX share price has had a brilliant run too. It’s up 39.43% over the last year and 90.57% over five years. That’s pretty impressive but anyone who reinvested all their dividends straight back into RELX shares will have done even better.

The trailing yield is a modest 1.62% but that’s misleading. Yields are calculated by dividing a company’s dividend per share by its share price. So when the share price rises – and RELX has risen an awful lot – the yield automatically falls.

Rising payouts

In practice, RELX has increased its dividend at an average compound rate of 9.1% a year for a decade, according to figures from AJ Bell. In that time, it has delivered a stonking total return of 397.1%.

Better still, it’s forecast to increase its dividend per share by 7.4% in 2024 and 7.9% in 2025. After their strong run, RELX shares look expensive trading at 32.05 times earnings. If profits slow or slip, the stock could come crashing down. It’s a risk with any share.

That’s why I invest in a spread of around 20 income-paying stocks, with different profiles. When one underperforms, others will hopefully compensate.

The long-term average total return on the FTSE 100 is 7% a year (although I hope to beat that). If I invested £4,000 today that would give me £30,448 after 30 years. Not bad from an initial £4k stake

If I took 4% of that each year, known as the safe withdrawal rate, I’d generate a second income of £1,218 a year. That’s just over £100 a month. Many of my portfolio holdings yield 7% or more, which would give me an even higher income.

Of course I wouldn’t stop at investing £4,000. By investing year after year, I’d hope my passive income ultimately hits tens of thousands a year.

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