Are you considering spreading your money into dividend stocks to build a long-term source of passive income?

Many people do this. With the right approach, it can be profitable.

So how long does it take and how much passive income can it earn? The first question is uncomplicated to answer – such a passive income plan can be adapted to the investor’s individual funds, tiny or huge.

Calculating the possible income from dividend stocks

The second question, how much he can earn, is a bit more complicated. There are three factors that determine how much passive income someone is likely to earn from dividend stocks.

One is how much they invest. The second is how long they hold the stock. The third part is the so-called dividend yield: the annual dividend earned expressed as a percentage of the share price.

Since dividends are never guaranteed to last, yields can be estimated in advance, but the reality may turn out to be different, for better or for worse.

Targeting income at a specific age

As an example, let’s work backwards. Imagine someone aged 55 wants to start earning £30,000 a year in passive income.

We assume they will achieve a compound annual growth rate of 7% over a period of time and then a dividend yield of 7% at 55. That’s just over double what they currently are FTSE100 profitability, but in today’s market I think it’s achievable by sticking with blue chip stocks.

If the investor is only 10 years senior (since they start at 45), achieving this goal will require a monthly investment of almost £2,500.

Starting at age 35, they can achieve the same goal by age 55 by investing around £830 a month. In other words, doubling your schedule doesn’t mean cutting your monthly premium in half. This is above by half, thanks to the power of combining.

It’s never too behind schedule to start investing. However, taking a long-term approach may mean that time is on your side rather than something you have to race against.

Finding stocks to buy

One stock that investors should consider for its passive income potential is the FTSE 100 asset management company M&G (LSE:MNG). The company pursues the so-called progressive dividend policy. Therefore, it intends to escalate its dividend per share every year. This has happened over the last few years and the yield is currently 7.8%.

Can this last? The positive side is that the asset management market is huge and likely to remain so. M&G has a huge customer base in many countries, its brand is powerful and it has proven to be able to generate significant free cash flow. This can be used to pay dividends.

What could go wrong? One concern is whether impoverished performance or market uncertainty could lead investors to take out more money than they put in, hurting returns. The first half was encouraging, but M&G has struggled with this issue in the past and it remains a risk.

Getting started

Of course, all of the above amounts may sound good in theory – but if someone doesn’t take appropriate action, knowing how to earn money passively will not be enough!

A good first step is to choose a share trading account, Stocks and Shares ISA or share trading app.