In this world of high interest rates and generous dividend yields, we have the capacity to earn sizeable yields on our investments and savings. So that’s got me wondering, “What could I do with a second income”? Today, I’m exploring how much I’d need to invest in UK stocks to take the summer off.
I appreciate this isn’t possible for everyone, but there are certainly more people in freelance or flexible working arrangements nowadays than five years ago.
How would it work?
Well, to generate passive income, I need to invest in dividend stocks. The larger the yield on the dividend stocks, the more money I’ll receive. But sometimes it pays to be wary of big dividend yields. I need to do my research to understand whether the yields in question are sustainable — the place to start is the dividend coverage ratio.
So, how much would I need to take the summer months — June, July, and August — off? I’m not planning on some influencer-esque Ibiza summer, but admittedly these are probably the months where I’d spend more money than usual. I’m saying £3,000 a month — enough to cover my rent in London and the rest for getting away.
It’s also worth remembering that I don’t necessarily need these dividends to be paid during the summer. Instead, I can just earn it during the year, and use it during the summer months. As it happens, the majority of my portfolio’s dividends does tend to come in April and May.
How it’s done
Well, I’m looking to generate £9,000. That’s the amount of money I need to take three months off in the summer.
I believe the biggest sustainable yield is around 8%. That would involve me investing in UK stocks like Aviva and Phoenix Group, which don’t offer much in the way of share price gains.
As such, I’d need around £112,500 fully invested in stocks with an average dividend yield of 8%. That is a lot of money, and it’s certainly more than most Britons have invested in their ISAs. In fact, the average value of an ISA for 25-34 year olds is around £6,500.
So, how do we turn £6,500 into £112,500? Well, it takes regular investment, compound returns, and time. For example, if I start with £6,500, contribute £400 a month — increasing my contribution by 5% a year — while practicing a compound returns strategy with 8% yielding stocks, after 10 years, I’d have £108,000 — almost enough.
At this point, I could start drawing down and using that money to fund my summer plans. And the thing is, I can benefit from this passive income every year. If I started saving at 20, I could take every summer off from the age of 30 — until inflation erodes the value of my passive income.
The post How much must I invest in UK stocks to take the summer off? appeared first on The Motley Fool UK.
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James Fox has positions in Aviva Plc and Phoenix Group Holdings Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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