How much should I invest to target a £10,000 dividend income?

Many people spend time and energy coming up with passive income ideas. But I like what I see as a direct approach to generating dividend income by buying blue-chip stocks.

That income is never guaranteed and I carefully choose the stocks I buy. If I wanted to set about targeting an annual dividend of £10,000, this is how I would do it.

High yield versus high quality

Some stocks offer small dividends, others have medium size and some seem to generate very high yields.

A common investor mistake is buying high-yielding dividend stocks without knowing how long the payouts will last.

That can lead to a double whammy. The company cut its dividend and the stock price fell. Not only could it hurt dividend income, it could mean the stock is worth less than it pays.

That’s why I always focus on buying shares in quality companies at attractive prices. If they also have a high yield, that can be good for my dividend income. But I try not to let the tail wag the dog.

Targeting £10,000

However, that order of priority does not mean that yield is unimportant. It is very important to calculate how much I need to invest to try and reach my annual dividend income target.

For example, if I invest with an average return of 5%, the goal would require me to invest £200,000. An average yield of 7% would take almost £143,000. If I can get an average return of 8%, I can make a profit of £10,000 a year on an investment fund of £125,000.

The feeding fund drips

But what if I don’t have any money to spare? I can build up to my target gradually. For example, if I invest £200 per month with an average return of 7%, after a year I should have a portfolio yielding almost £170 in annual dividend income.

At my monthly contribution rate, I should reach my annual target of £10,000 after about 59 years. It’s a very long time to wait, although I was able to earn more and more profits as the investment pot grew.

An alternative would be to reinvest the dividend, which is called compounding. If I compound every year with an average return of 7%, investing £200 a month could allow me to reach my target annual dividend income of £10,000 after 24 years.

Choose stocks with dividend income potential

Some high yielding blue-chip stocks in my portfolio such as British American Tobacco and M&G in fact it has yielded more than 7% now. If I had continued to invest in a diversified portfolio of shares with these different returns, I could have potentially turned my £200 monthly investment into £10,000 of annual dividend income sooner.

But most importantly, I will also focus first on finding companies with a strong business model and strong finances that I think will maintain or increase their dividends in the future.