Dear DTA,

My goal is to build a solid monthly return in income of $5,000.

-Howard H.

Hi, Howard. It’s great to hear from our readers. Thanks so much for your email.

Your goal is very straightforward. And so it won’t be terribly complicated to get you there.

However, I like to say that building substantial passive investment income is simple but difficult.

It’s simple because it’s not hard to do the math and figure out how to get there.

But it’s difficult because it’s very challenging to actually take the necessary steps day in and day out.

It’s just like climbing a mountain.

We can talk about how to climb a mountain and quantify the journey in terms of equipment, timing, etc.

But it takes a certain amount of will to actually climb those steps in real life.

Likewise, you’ll have to dig deep if you want to build that kind of passive investment income within a reasonable amount of time.

That said, we can quantify things a bit for you to narrow down the specifics a bit more.

I will say that you’ve come to the right place when talking about building significant passive investment income in a fairly short period of time.

That’s because I’ve done it myself. I quantified things and made it happen. I saw a mountain and climbed it.

Indeed, you can see my real-money, real-life portfolio, which is chock-full of high-quality dividend growth stocks.

Best of all?

This portfolio generates five-figure passive dividend income on my behalf, which rendered me financially independent in my early 30s.

If that’s not great enough, this income is organically growing all by itself, growing my opportunities and options every single day.

That’s because I invest in dividend growth stocks.

These are stocks that represent equity in businesses that are selling in-demand products and/or services to people all over the world, increasing their profit in the process.

And as their profit increases, they share that increasing profit with their shareholders in the form of growing dividends.

See, shareholders are the collective owners of any publicly traded company.

And so any profit a publicly traded company generates technically belongs to the shareholders.

Well, dividends are a portion of that profit.

A dividend is like a bucket of water from the profit well. As the well’s water supply grows over time, the amount of buckets one can take from the well also grows.

I can see that you’re awfully thirsty – $5,000 in passive investment income is a serious goal – which is why you’ll require a sizable portfolio full of little profit wells with growing water supplies.

Now, my personal portfolio yields almost 3.5%.

But I don’t think a 4% portfolio yield is at all unreasonable, especially with your focus on income.

A 4% portfolio-wide yield would require a dividend growth stock portfolio of $1.5 million to produce $5,000 per month in totally passive investment income.

I don’t know what your means are, so I’m not sure what it would take to get you there, but I can say that a combination of high income and low expenses will be the most realistic path for most people, assuming you want to get there within a reasonable amount of time (within 20 years).

I also don’t know your financial position, so I’m just going to assume you’re starting from zero.

If you are starting from zero, and you consider a time frame of 20 years or less reasonable, we can start to put some numbers together.

You would need to save and invest approximately $25,000 per year at a 10% compounded annual return for 20 years in order to generate an ending portfolio of $1.5 million (starting from zero).

This simple calculation ignores inflation and taxes for the sake of brevity.

That portfolio would produce the kind of passive investment income you’re looking for.

If you’re ahead of the game (i.e., you have a lot more than zero to work with right now), things get even easier.

However, it wouldn’t take that much effort, in my opinion, to save and invest $25,000 per year, even if you’re not earning a particularly high income.

I can tell you that the bulk of my personal portfolio (linked above) was built in a time frame of about six years, and I did this on a decidedly middle-class salary of approximately $50,000 per year.

I also started from zero. Scratch that. I actually started below zero: I was in debt when I started my journey up that mountain in mid-2010 at almost 28 years old.

But I had to live extremely frugally. I had to have the kind of will that allows one to live, breathe, eat, and sleep saving and investing. Everything else in life took a back seat to the financial goals. I recount everything I did in my “blueprint” to early retirement.

I saved well over half of my net income… year in and year out, for years. And I still do this.

And then I took my excess capital and invested it in high-quality dividend growth stocks, which often represent some of the best businesses in the world.

You can find more than 800 US-listed dividend growth stocks by checking out David Fish’s Dividend Champions, Contenders, and Challengers list – an invaluable compilation of data on stocks that have been paying their shareholders increasing dividends for at least the last five consecutive years.

These are often the best businesses in the world because that’s the kind of business you have to run in order to generate the increasing profit year in and year out that can fund increasing dividends to your shareholders year in and year out.

Just imagine running your own business. And then imagine you have greedy shareholders that expect a dividend on the profit you’re generating. Worse yet, they expect the dividend you’re paying to them to increase every year.

Think of what kind of business you have to run in order to make that happen.

Well, that’s what you’re working with when you look at high-quality dividend growth stocks like Johnson & Johnson (JNJ), PepsiCo, Inc. (PEP), and McDonald’s Corporation (MCD) – all of these stocks have paid increasing dividends for decades.

The odds of these businesses – and businesses like them – continuing to pay shareholders increasing dividends for decades more remains incredibly high.

After all, collecting $5,000 in passive investment income is wonderful.

But inflation will slowly but surely chip away at that income, reducing it in real terms as things around you become more expensive.

That’s why dividend growth investing is so wonderful: you’re generating not just passive investment income, but you’re generating increasing passive investment income, which allows your purchasing power to expand (rather than shrink) over time.

You have some numbers to work with here, but climbing a mountain is a bit more complicated than just knowing the height. You also need to have tools to work with.

We’ve got you covered there.

Fellow contributor Dave Van Knapp put together a series of lessons on dividend growth investing, which serve to educate novice and experienced investors alike on what this strategy is, how it works, and how to successfully implement it in your life.

And then if/when you’re ready to put capital to work with some of these excellent businesses, I personally highlight a compelling long-term dividend growth stock (based on quality and valuation at the time of publication) every Sunday, which is part of a longstanding Undervalued Dividend Growth Stock of the Week series.

You have some tremendous resources at your disposal here, Howard.

But it’s ultimately up to you to climb that mountain.

And there’s no time like the present to start.

I wish you luck and success.

Jason Fieber

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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.