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Earning a passive income from dividend shares can be a low maintenance strategy to generate cash from investments.
However, there are no fixed rules about what size investment pot’s needed to generate a certain level of income. Here, I’ll look at some example scenarios, based on a target income of £6,000 a year, or £500 a month.
I’ll also take a look at a FTSE 100 dividend heavyweight with a 9.5% yield that could make a useful contribution to an investor’s income goals. For these examples I’ll assume the shares are held in an ISA, meaning that dividend income will be tax-free.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
How much cash is needed?
The level of income received from a share portfolio will depend on the average dividend yield of the stocks in the portfolio and the rate of dividend growth.
For a long time, the standard advice used by financial advisers has been the 4% rule. This states that if an investor withdraws 4% from their investments each year and increases this with inflation, there should be very little chance of running out of cash in a 30-year period.
I reckon that’s a useful guide for a conventional retirement, but it’s not the only option.
One alternative is to start withdrawals at a higher rate, but keep the amount fixed each year. The real value of your income will decline over time due to inflation. But having more income upfront might be useful in some circumstances.
Here are some examples of how much cash might be needed for a £500 monthly income, based on different withdrawal rates:
| Withdrawal rate | Investment required |
| 4% | £150,000 |
| 5% | £120,000 |
| 6% | £100,000 |
| 7% | £85,715 |
What else should an investor consider?
The withdrawal rate makes a big difference to the size of the investment pot required to hit an income target.
But there are also some other things to consider. One important thing to remember is that dividends are never guaranteed and can always be cut. Dividend safety’s important. A cut will mean a reduction in income and will often also trigger a nasty share price slide.
Safety depends on factors including a company’s profitability, spending needs and debt levels. Ultimately, the question is whether a business generates enough surplus cash each year to support its payout. If it doesn’t, then its dividend may be living on borrowed time.
A safe 9.5% yield?
One company at the high-yield end of the income market is life insurer Phoenix Group (LSE: PHNX). Shares in this FTSE 100 firm currently boast a forecast dividend yield of 9.5%.
Some investors avoid this sector because of its complex accounts. Investors have no real choice but to trust that the company’s done its sums correctly. There’ll always be a risk of surprise problems.
However, Phoenix’s cash generation and its dividend have proved reliable through some tricky times. The shareholder payout has risen from 31p in 2010 to 54p in 2024 and hasn’t been cut since the company’s 2009 flotation.
My analysis shows Phoenix’s cash generation covered its dividend comfortably last year, leaving room for some debt repayment and growth investment.
I see this as a good quality high-yield stock to consider for investors whose main requirement is a high income.
