Passive income investors: how I’d make $1,000 a month without working

Buying high-quality dividend shares at cheap prices could lead to high returns in the long run, as well as a generous passive income.

seedling plants growing out of rolls of money representing growth shares

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cheap dividend shares do not only offer a generous passive income today. In many cases, they have the potential to produce strong capital growth and dividend growth over the long run so that an investor can enjoy a rising income in the coming years.

Through buying a diverse range of high-quality dividend stocks at cheap prices, it is possible to ultimately replace a wage. They could deliver a sustainable and resilient income for a wide range of investors.

Buying cheap dividend shares for a long-term passive income

The high yields on offer from many dividend shares suggest that they offer good value for money, as well as a worthwhile passive income. Despite the stock market rally in the second half of 2020, a number of companies trade at prices that are below their long-term averages. This may mean that they provide scope for capital growth over the long run that enables an investor to build a surprisingly large nest egg.

Clearly, some high-yielding dividend shares face difficult operating outlooks in the short run. The impact of coronavirus on some industries has been significant. However, those companies that have solid financial positions, sound growth strategies and affordable shareholder payouts may become increasingly popular in a likely stock market rally in the coming years. An improving economic outlook and stronger investor sentiment may lift their prices – especially as other popular assets offer disappointing passive income opportunities in many cases.

Building a portfolio for a long-term income

Of course, the stock market’s uncertain outlook means that there may be challenging periods ahead for passive income investors. For example, in the short run a portfolio of dividend shares could experience declines that lead to paper losses as a result of political change or a wide variety of other risks.

However, over the long run a diverse portfolio of high-quality income stocks could produce a surprisingly large portfolio. For example, indexes such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) have produced annualised returns of around 8% over recent decades. Therefore, a $500 monthly investment could be worth around $300,000 within 20 years, assuming the same rate of return as the stock market has produced in the past. From this, a 4% annual withdrawal would equate to a $12,000 annual income that may provide greater financial freedom for many individuals.

Capitalising on today’s buying opportunities

It may be difficult for many passive income investors to buy cheap dividend shares today. As mentioned, the world economy faces numerous risks that may derail its prospects.

However, today’s low share prices for many dividend stocks may provide the opportunity to buy high-quality companies while they trade on attractive valuations. Over time, this may lead to higher returns that produce an even greater portfolio valuation and income in the coming years.

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing for Income

two children dressed in business attire with joyous, wide-mouthed expressions count money at a desk covered in cash and sacks of money either side.
⏸️ Dividend Shares

Top-10 ASX dividend share delivers market-thumping share price gains

The Holy Grail for income stocks is to return strong capital gains as well

Read more »

Fund manager and asx share investor Jun Bei Liu
Share Market News

ASX dividends will be up 30% this year: fundie

One sector is set to boost payouts by almost 70% this year, predicts Tribeca Investment Partners portfolio manager Jun Bei…

Read more »

asx dividend shares represented by tree made entirely of money
⏸️ Dividend Shares

How I’d invest in dividend shares to make a passive income for life

I think that investing money in dividend shares could lead to a relatively high and growing passive income over the…

Read more »

three reasons to buy asx shares represented by man in red jumper holding up three fingers
⏸️ Investing for Income

3 steps I’d take today to make passive income and never work again

Buying a diverse range of dividend shares could produce a large passive income in the long run that ultimately replaces…

Read more »

Graphic image of scissors cutting banknote in half
⏸️ Investing for Income

Reserve Bank tipped to cut rates to record lows next week

Westpac Banking Corp (ASX:WBC) and the latest cash rate futures are indicating that the Reserve Bank will cut rates next…

Read more »

Happy young man and woman throwing dividend cash into air in front of orange background
⏸️ Investing for Income

How to make $50,000 of passive income with ASX dividends

Could Altium Limited (ASX:ALU) and Ltd (ASX:KGN) shares be the key to generating $50,000 of dividends each year?

Read more »

Woman with binoculars on green background, looking through binoculars, journey, find and search concept.
⏸️ Investing for Income

These ASX ETFs could be perfect for dividend-seekers

These ETFs give income investors exposure to Coles Group Ltd (ASX:COL), Commonwealth Bank of Australia (ASX:CBA), and Fortescue Metals Group…

Read more »

Interest rates
⏸️ Investing for Income

Westpac (ASX:WBC) tips RBA cash rate cut in November

Westpac Banking Corp (ASX:WBC) is tipping the Reserve Bank to make a cut to the cash rate in November...

Read more »