Some people love their jobs – but others dream of quitting, if only they had a way to fund it. Could the stock market provide a possible solution?
Dividend shares can be a lucrative source of passive income
Specifically, is it possible for someone to replace the income they earn with passive income from dividends paid by shares they own?
The short answer is yes, it can be. But there is a lot more to it than that!
Dividends can be lucrative. But even a share with a dividend yield of 6% — double the current FTSE 100 average – only pays its owner £6 per year for every £100 they invest. That presumes the dividends last, which is never guaranteed.
So trying to replace their current income (whatever it is) with dividends would mean investing over 16 times as much.
Replacing an income, over time
While, for most people this may be no overnight way to retire early, that does not mean the idea has no merit.
With some patience and a long-term approach, it could help someone bring their retirement forward.
For example, let me use the Office for National Statistics’ May data for the average weekly total earnings, of £749. That weekly number adds up to £38,948 per year.
To earn that in dividends from a stock market portfolio yielding an average 6% would require it to be worth a little over £649k.
That is a lot. But say someone puts in £1,000 per month and initially compounds the portfolio at 6% per annum, only taking the dividends out as cash once the portfolio hits the target size.
Doing that would take 25 years. That sounds like a long time. But it means that someone starting from scratch today with this approach could target replacing their income entirely with dividends by the time they are 60.
That is quite a few years ahead of the current State Pension age.
Getting going can be simple
With larger contributions, things could be speeded up.
A higher yield could also help and may be possible, but double the FTSE 100 average is already ambitious in my view when sticking to well-known proven businesses.
Of course, to do this requires some way to buy shares. That can be simple to set up, whether it is a share-dealing account, Stocks and Shares ISA or trading app.
Could this share help hit the target?
One income share I think is worth considering in this context is Legal & General (LSE: LGEN).
With its 7.5% dividend yield, the financial services firm is more lucrative than any other company in the FTSE 100.
Not only that, but it aims to keep growing its dividend per share each year, as it has done the past few years.
But the share price’s 10% growth in the past five years badly lags the 47% achieved by the wider FTSE 100. That points to some of the risks facing this share, such as the sale of a big US business this year, meaning revenues and profits could fall.
Still, Legal & General has proven its strong cash generation potential. It has a large customer base and I also like its focus on the pensions and retirement savings market, where demand is resilient.
What income stock do we like better than Legal & General Group Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
