I want £500 in yearly dividends – how much do I need to invest?

What total would you have to invest in the stock market to get £500 worth of dividends every year?

This is the amount you can earn in dividends and not pay tax on them. Though if you have a larger dividend income from your investments than this amount you can shield the income from HMRC by holding them within an ISA or SIPP.

It depends where you look

The answer to the £500 question is that it depends where you’re invested. Certain investments offer more generous income than others – with the dividend yield the main measure of this generosity. For an individual company you can calculate the yield by dividing the dividend per share by the share price.

So, for example, if Company X paid out a dividend per share of 5p and the share price was 100p the yield would be 5%. Meaning you would need a £10,000 investment in Company X to get £500 in annual dividends.

Many investors look for diversified exposure to the markets through actively managed funds and trackers to avoid being caught out should something go wrong for an individual company.

This has an extra layer with income investing because businesses pay out cash to shareholders at their own discretion and if you were reliant on an individual stock for your dividends you would be exposed to the risk of this payout being cancelled or scaled back.

To work out the dividend yield for an index you divide all the aggregate dividends paid by companies in the index by the total market value of the index.

While dividend forecasts are not guaranteed they can offer a more useful guide to the income you might expect to receive than simply looking at what dividends have been paid historically.

With this in mind, we’ve used Stockopedia to get the forecast 12-month dividend yields for some of the world’s top markets and calculated what you would need to invest in these indices to get £500 in dividends. These markets can be accessed using tracker funds and ETFs, though it’s important to check whether the ETF distributes the cash from dividends or accumulates it in the fund.

This information can be found in the relevant fund’s factsheet but for a quick check you can look for ‘acc’ (in the case of funds which roll the income into the fund) and ‘inc’ or ‘dis’ (for those which pay it out) in the name of the product to find out.

Another consideration is the impact of currency movements as dividends received in a currency other than pounds will be affected by these movements.

A global comparison

Based on the FTSE 100’s 12-month forecast yield of 3.3% you would need a total of £15,152 to get to the £500 mark. The UK market is known for paying out a relatively generous income although the strong performance of the FTSE 100 means the yield is lower than it has been in recent years.

It is still a lot higher relative to Wall Street’s flagship S&P 500 index. US companies traditionally allocate more cash to buying back their own shares or investing for future growth than dividends. Using the S&P 500’s forecast yield of 2.1% you would need more than £20,000 to hit the £500 number.

Dividends are only part of how you make money from shares and the S&P 500 has offered a superior total return (capital gain and dividends) then most other global markets over the last decade or more.

The Japanese Nikkei 225 index has a slightly higher yield than the S&P 500 but you would need exactly £20,000 to reach £500 in annual dividends.

Some emerging markets offer more generous yields – including Hong Kong’s Hang Seng index – however this reflects the higher risk profile associated with these markets.

How to invest for income

The table shows examples of exchange-traded funds tracking some of the global indices mentioned in the article which pay out rather than reinvest any dividends.

There are lots of different options when it comes to investing for income and some individual stocks pay out particularly generous yields.