Passive income through Dividends

Passive income is broadly defined as money coming into your pocket without you working for it. You may have worked at the start or have put money at the start of the business but you no longer works for the money.

For me, I have a goal of getting passive income through the dividends from my stock portfolio. After doing some calculations, i realised that though it is easy to earn money via dividends, it is not easy to have dividends enough to cover my expenses.

For an illustration, let's assume you need $2,000 as your monthly expenses. This means that you would need $24,000 to be credited into your bank account every year. At this moment, for blue chips, i believe the average dividends is about 4-5%. Let's take 5%. If 5% is $24,000, it means you would need to put in $480,000 in the 1st place. For those of you who have that type of money, please ignore my blog, i don't think this is suitable for you. If you think you can slowly accumulate, you can but it would take a long long time. Let's assume that you are 30 years old. If your goal is to have $2,000 as dividends by the age of 50, you would need to save $24,000 per year, which also means saving $2,000 a month. I am not sure how many of you can save $2,000 a month, but i sure can't.

After pouring enough water over your initial fire, I am here to say that though it is hard, there is a faster way. This method has the compounding effect. Let's say your initial capital is $10,000. After the 1st year, you would have $10,000 still in your portfolio(assuming market is stagnant) and the $500 as your dividends. At the start of your 2nd year, assuming you save $10,000 each year, you would have $20,500 as your portfolio. Every time you get your dividends(which will be always increasing), put everything back into your dividend earning portfolio.

With this method, you would be surprised at the rate that the dividends are able to grow. If you saved $10,000 a year, you will have $200,000 in 20 years. Using my method, assuming no change in the stock market prices and the dividends is held steady at 5% pa, you will have $357,192.52 in 20 years. That is a difference of $157,192.52, which is 78.6% more than the normal savings. So what do you think?