The concept of generating a passive income from the stock market isn’t new. But I still feel there’s a notion among some investors that making four figures a month is something that’s pretty unachievable.
Yet from looking at the numbers, and using a reasonable time frame, it could be more realistic than is appreciated!
Key details
Clearly, it’s not a goal that’s likely reached overnight. In theory, if someone has a large lump sum sitting around, it could be possible to invest it all and then start making sizeable dividend income from a standing start. But for most people, this is unlikely.
Rather, a good strategy would be to invest regularly, such as once a month. With smaller amounts accumulating over time, it can help avoid cash flow pressures. It also allows the benefit of compounding.
For example, let’s say someone invested £500 a month in dividend shares yielding 7% on average. If the dividends were reinvested back into the portfolio, after a decade, the compound yield would be 7.23%. This added part (0.23%) comes from keeping the money in the portfolio rather than spending it immediately.
Using the above example, at the end of year 17, the average monthly income could be £1,086. But some might not want to wait this long to hit the goal.
To try and cater to this, increasing the investment figure to £750 a month would trim about four years off the time needed. Another option would be to try to boost the portfolio yield. If the yield increased from 7% to 9%, the target goal could be reached just before year 11.
Of course, planning this far in advance is difficult. Companies may cut dividends, sectors could do better or worse due to AI disruption, or a host of other things could mean it takes more or less time to reach the goal.
A target yield stock
The other key part of the strategy is picking good dividend shares to generate the income. One example I like at the moment is MONY Group (LSE:MONY). The stock’s down 17% in the past year, but has a dividend yield of 7.39%.
Best known for its MoneySuperMarket platform, MONY operates digital comparison sites that help consumers find cheaper deals on everything from insurance to credit cards. At its core, MONY’s a middleman business. This asset-light model’s attractive for dividend investors because it generates strong cash flow without requiring huge capital investments.
The recent share price fall has come from concerns about slowing growth in the insurance market, especially in car insurance. Further, concerns over artificial intelligence (AI) disrupting comparison websites have also weighed on sentiment, with some investors fearing that AI assistants could eventually replace traditional comparison platforms.
Even though these are risks going forward, I believe the longer-term outlook could actually be stronger than some think. The business is expanding beyond pure comparison services into membership products such as SuperSaveClub, which increases customer loyalty and recurring revenue.
As for the dividend, the firm currently has a cover ratio of 1.4x. This means that the current earnings per share easily cover the payments, so I don’t see an immediate threat to the dividend being reduced.
Overall, I think it’s a good income stock for investors to consider as part of this strategy.
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Jon Smith has no positions in any shares mentioned.
