If you want to create an annual income of $100,000 in dividends then you just have to follow the below steps:
First: Earn money and save it
Money doesn't just appear out of thin air, as much as banks would like to you think of a credit card like that. First, you have to make some money through a job or your own business and then live below your means. In other words, spend less than you earn.
Your budget will be different from your neighbour's budget and it will be different to your work colleague's budget. I can't tell you exactly what to do and there is no right answer about what the right amount is to earn or save. Whether you earn $40,000 or $200,000 it's just a matter of how much you save that counts.
Everyone has to spend some money to cover the necessities like a roof over their heads, gas & electricity and so on. But, after that, it is both earning more and avoiding lifestyle inflation for your extra money that will help grow your savings over time.
Next step: Invest
Once you have saved some money it's time to put some of it into the share market. You can start with as little as $500, but some people say bigger amounts (eg $1,000) is better because your brokerage cost is a smaller percentage of your investment.
To get the best out of share investing I think there are two ways to do well for your life and/or wealth:
One way is to spend barely any time looking at shares, choose diversified investments, don't frequently monitor how they're going and completely ignore market volatility along the way. This approach should lead to pleasing compounding returns and should also give you more time to earn more money or more time for your personal life. Some of the best options for this route in my opinion are: Magellan Global Trust (ASX: MGG), Vanguard MSCI Index International Shares ETF (ASX: VGS), iShares S&P 500 ETF (ASX: IVV) and MFF Capital Investments Ltd (ASX: MFF).
The other option is to try to create the best investment returns you can. I'm not saying to go looking for the most high-risk speculative stocks you can find, I mean choosing quality long-term growth shares and buying them at attractive prices. I believe some good examples right now are: Challenger Ltd (ASX: CGF), REA Group Limited (ASX: REA), WAM Microcap Limited (ASX: WMI), Costa Group Holdings Ltd (ASX: CGC) and Bapcor Ltd (ASX: BAP).
Final step: Re-invest until you reach your goal
The magic of the share market works best when you re-invest your dividends to buy more shares. The best strategy may not be to even use the dividend re-investment plans, instead simply take the dividends as cash and add that money to your favourite investment choice at the time.
If your portfolio has a grossed-up dividend yield of approximately 6% then it would take a portfolio of around $1.66 million to hit the $100,000 income goal. That's a lot of money, I didn't say it would be easy! However, if you start with $0 and investing $1,000 a month which compounds at 10% a year it would only take 27 years to make your $100,000 goal dream come true. A 20 year old could hit the goal before the age of 50!
It is very possible to invest more than $1,000 a month or generate investment returns better than 10% a year, which would bring you to your goal faster.
