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Beat the RBA: How to create an annual income of $100,000 in dividends

The RBA has pushed interest rates to a really low level. I think the way to beat the rate gloom is to go for dividend shares that could help you build an annual income of $100,000 in dividends.

If creating an excellent dividend stream is your goal, then all you need to do is follow these steps:

Earn money and save it

There’s no easy way to get around the problem that you need to make some money yourself first. “Money makes money”.

Banks like Commonwealth Bank of Australia (ASX: CBA) may like you to believe that money grows on trees, but you’ll need to find a pretty good job or do well running your own business to get some cash hitting your bank account.

Once you’ve got some money rolling in you need to live below your means. If you’re spending all your income then you’ll never be able to get ahead. Spending less than you earn sounds easy, but plenty of people can’t, or don’t, do it.

Everyone’s budget is different. Your neighbour will have a very different budget to you. Your best friend will have a different budget to you. Your parents will have a different budget. There isn’t a one-size-fits-all answer for budgeting, we have different jobs, different obligations and different lifestyles.

It doesn’t matter whether you earn $50,000, $100,000 or $250,000, it’s how much you save that’s most important.

You need to pay for the basic necessities such as a roof over our heads, the food, heating & electricity etc. After those expenses are covered it’s a matter of growing your job earnings but avoiding excessive lifestyle inflation so you can funnel more money to savings.

More money for savings

After you’ve set up a decent emergency fund you can put all of those savings into shares. You don’t need $10,000 to start investing, you can invest with as little as $500, although most experts would say it’s a good idea to invest at least $1,000 each time so brokerage costs don’t eat up too much of your investment.

To get the best out of investing I think there are two methods that work best 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 are: iShares S&P 500 ETF (ASX: IVV), MFF Capital Investments Ltd (ASX: MFF), 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 today are: WAM Microcap Limited (ASX: WMI), Costa Group Holdings Ltd (ASX: CGC), Webjet Limited (ASX: WEB) and Altium Limited (ASX: ALU).

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 even have to utilise the company’s dividend re-investment plan, you could just take the dividends as cash and plough the money into the best possible share investment you can see each 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 never said it would be easy!

If you start with $0 and invest $1,000 a month and it compounds at 10% a year it would only take 27 years to make your $100,000 dividend income goal dream come true. A 20 year old could hit the dividend goal before the age of 50! Wouldn’t that be great?

It is entirely 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.

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Tristan Harrison owns shares of Altium, COSTA GRP FPO, Magellan Flagship Fund Ltd, MAGLOBTRST UNITS, WAM MICRO FPO, WAMGLOBAL FPO, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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