How to collect £1,000 per month from a FTSE 100 stock

Buying shares and reinvesting dividends can earn investors a nice monthly income. And Stephen Wright thinks the FTSE 100 is the place to look.

Stephen Wright ❯

Stephen has a PhD in Philosophy and teaches at the University of Oxford. He's an enthusiastic Warren Buffett follower and focuses on buying quality businesses at sensible prices. He's also a podcaster with the PlayingFTSE show.

Published 15 October, 2023 3:19 pm BST

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The FTSE 100 has some great stocks for investors seeking passive income. And this is being boosted by interest rates being at their highest levels for years.

Lloyds Banking Group is a good example. With a dividend yield of just under 6%, I think this could be a great time to invest.

Dividend schedule

Over the last five years, Lloyds has paid around a third of its profits to shareholders as dividends. But, like a lot of FTSE 100 companies, it doesn’t do this at regular intervals.

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The company makes its distributions in May and September. That’s fine, but it means the best way to aim for £1,000 per month is to think in terms of £12,000 per year.

This year, the company paid a total of 2.52p per share in dividends to shareholders. So to receive £12,000, I’d need to have owned 476,190 shares.

At today’s prices, that would cost £205,857. I don’t have that on hand, but buying shares over time could be a way for me to get there.

Reinvesting and compounding

With £1,000 today, I could start with 2,310 shares. And if I did the same again next month and each month after that, I could increase my stake further.

Doing this for a number of years means I’d earn dividends, which I could use to buy even more shares. My starting £1,000 investment, for example, could earn £58.22 next year.

If the Lloyds share price stays where it is, I’d be able to buy another 134 shares, which would earn even more passive income the next year. Repeating this process would allow my gains to compound over time.

How long would it take me to get to 476,190 shares? It’s hard to say exactly, but I think I could get there within 12 years by investing £1,000 a month and reinvesting dividends.

Risk and uncertainty

With Lloyds, it’s highly likely that the company’s earnings will fluctuate from year to year. And I expect the share price to do the same.

Importantly, that means the risk of the business not being in a position to maintain its 2.52p payout in a given year is quite high. Over time, though, I think the situation is different.

I don’t know what the company’s earnings or dividends will be in any specific year. But I’m confident the average over a decade will be good.

In other words, the path with Lloyds shares is unlikely to be smooth. But investors who buy for the long term will face the ups as well as the downs and I expect those who stay the course to do well.

Passive income

It’s impossible to be 100% certain that £1,000 per month in Lloyds shares for 12 years will be enough to build an investment that generates an annual income of £12,000. But the chances look good to me.

It doesn’t have to be Lloyds, though. Unilever offers less volatility with a lower current yield and Halma has better growth prospects, but these will take time to materialise.

There’s more than one way to collect £1,000 a month by investing in the FTSE 100. But I think buying shares gradually and reinvesting dividends is the best way to go.