If you want to make a yearly income of $100,000 in dividends then you just have to follow the below steps:
Step 1: Earn money and save it
Sadly money doesn't just magically appear, although banks like Commonwealth Bank of Australia (ASX: CBA) would like you to believe that. Firstly, you need to make a decent amount of money from your job or your own business and then live below your means. You may have heard this described as 'spend less than you earn' It sounds pretty obvious but a lot of people don't, or aren't able to.
Your budget will be completely different to your neighbour's, which will be different to your best friend's, which will be different to your work mate's. There's no one-size-fits-all approach with budgeting, we all live different lives – there's no correct amount to earn or save. Whether you earn $50,000 or $250,000, it's just a case of how much you save that makes the biggest difference.
We all need to cover the basics like a roof over our heads, food, gas, electricity and so on. But after you earn enough to cover those expenses, you need to somehow boost your income whilst avoiding complete lifestyle inflation so that extra money can be funnelled towards saving.
Step 2: Invest the money
Once you have set some money aside for emergencies, it's time to put the extra money to work into the share market. It's okay if you haven't saved a lot, you can start with as little as $500, but most people think you should invest at least $1,000 at a time so that brokerage costs eat up less 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 my favourite options with this tactic in my opinion are: iShares S&P 500 ETF (ASX: IVV), MFF Capital Investments Ltd (ASX: MFF), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Magellan Global Trust (ASX: MGG) and WAM Global Limited (ASX: WGB).
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 think some good examples are: WAM Microcap Limited (ASX: WMI), Costa Group Holdings Ltd (ASX: CGC), Webjet Limited (ASX: WEB), Altium Limited (ASX: ALU) and InvoCare Limited (ASX: IVC).
Step 3: Re-invest until you reach your goal
The best way to utilise the strength of the share market is to re-invest the dividends you receive so that compounding can work its magic over time. You don't have to use the company's dividend re-investment plan, you could just take the dividends as cash and plough the money into the best opportunity 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 invest $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.
