How I’m trying to turn £1,500 into £5,000 via passive income investing

Passive income investing refers to buying shares that pay dividends. With a portfolio of such stocks I can aim to generate regular monthly income. One of the great things about passive income investing is that once I’ve got my strategy sorted out, I don’t have to make many changes over time.

Starting with the basics

Before I look at how I can try to turn £1,500 into £5,000, I need to get my basics sorted. The most important part of this is to pick the right dividend stocks. It sounds obvious, but this isn’t always the most straightforward thing to do. It depends on a mix of things. The dividend yield is clearly important. Yet the track record and consistency of the dividend payment is also important. Add into the mix the future outlook for the specific company (and sector), and there are many things I need to think about.

I can filter down stocks with these metrics, to give me a shortlist to pick from. From here, I’d aim to pick a good selection to invest in, perhaps up to a dozen. This will allow me to diversify my risk away from one or two companies in particular. In the future, if one of my picks turns out to be a dud, this won’t ruin my overall passive income portfolio.

Running the numbers

With the basics sorted, I can now add in the monetary forecasts. Let’s say that I’ve got £1,500 that I want to grow to £5,000. Yes, I could go down the route of growth stocks. But I’m picking the passive income investing route.

For my passive income strategy, I’ll need to pick up dividends and reinvest them back into the stock. This will increase my overall holding, meaning my next dividend payment will be larger. Over time, this process can speed up the time it takes for me to reach my goal of £5,000.

If I assume an average dividend yield of 6%, my £1,500 would grow to £5,000 after 20 years. This assumes I can reinvest my dividends back at 6% as well. This might seem a long time, but it’s important to remember that I’m not adding in any additional money to this pot. The growth is purely coming from the dividends over time.

If I want to speed up the process, then I could invest the £1,500 initially, then chip in an extra £100 each quarter. This would dramatically bring down the time needed to reach £5,000. By the end of year six I’d have reached my goal — assuming the dividends aren’t cut and the companies continue to perform (which they may not, of course).

The benefit of passive income investing

I think this goes to show that even without adding much to a dividend portfolio, reinvesting the passive income can help my overall investment pot to grow over time. For the purpose of these calculations, I assumed the share price remained flat. In reality, I might also pick up some gains from the share price moving higher over time as well.

In terms of specific stocks that I’d buy for this strategy, some of my favourites are discussed here.

Jon Smith and The Motley Fool UK have no position in any share mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.