The quick answer is that you can make around £18,000 per year in dividends, before tax, if you invest £1 million in a fund like Vanguard’s Lifestrategy 80% Equity or 60% Equity fund. If you wanted to generate even more in dividends, while giving up some price appreciation and stability, the 1 million pounds invested in the VUKEIII (Vanguard UK Equity Income Index Fund) would get you approximately £53,400 in dividends annually.
Of course it’s important to remember that these data point reflect a point in time and this data is accurate as of writing this piece. Your actual earned dividends will vary over time based on the dividend yield at which you bought your investments, along with market and economic conditions.
It is also important to remember that dividends are just one form of return from the stock market. Price appreciation is the other one. It is therefore important to focus on total returns, which is the sum of returns from price appreciation and dividend income.
Dividend Income Calculator – UK
You can use this calculator to determine how much in dividends you can generate from your portfolio in a given year. You simply need to enter the following details:
- Portfolio Value: The value (in pounds) of your investment or portfolio
- Dividend Yield: The dividend yield for your stock, ETF, or mutual fund.
The calculator will show you how much can earn in dividends each year. This is just a simple demonstration to help you get an idea of what you can expect. As the markets and economies are always fluctuating, your actual results will vary.
Please hit Calculate to proceed.
Can you live off the dividends of £1 million pounds?
The answer depends on many different factors, as we have discussed in our deep dive on asset allocation. There are important questions around what type of lifestyle you expect and its associated expenses, how long you expect to live off the dividend income, your risk tolerance, etc. You also have to consider what happens if the economy enters a recession and the companies in your portfolio announce major dividend cuts.
Depending on your needs and any other sources of income, like pensions, you may potentially be able to live off just the dividends. However it could be a tight situation, as unlike interest income, dividends are never guaranteed. As discussed earlier, the dividends could range anywhere from £18,000 to £53,400 annually depending on what you have invested in.
The options to improve your income would be to either sell a portion of the portfolio each year to harvest your gains, or to increase your total portfolio value to an amount above £1.5 million. The capital harvesting option is actually a reasonable one as it is more tax efficient that getting income through dividends.
The £1 Million Dividend Portfolio
We have earlier talked about how to invest a portfolio to generate £1,000 a month in dividend income. We’ve also looked at the best options for investing £1 million to grow your wealth. Let’s look at it the other way now: how to invest 1 million pounds for income?
This discussion can go in one of many directions as there are numerous options. You can make the situation as easy or complicated as you like However if you want to keep things really simple and still attain good returns, I would suggest one of the following two options discussed below.
The Ready Made Approach
If you feel that investing is too complicated and that you’d rather have someone else do it for you, the best approach would be to work with a wealth advisor – whether it’s a human or it’s a modern-day service like an online or app-based advisor.
Typically you are asked questions about your risk tolerances, your goals and objectives, and the advisor/service works to generate a portfolio for your £1 million with the best possible allocation to meet your needs. On an on-going basis, these services then reallocate and rebalance your portfolio as per changing market conditions.
We’ve covered these services in great detail in other sections of this site, so I have provided a link to some of these articles for you to explore further and find the best fit:
- Hargreaves Lansdown – Great for the broadest range of fund and share options
- Moneyfarm – Best for passive investors who want a simple no fuss approach
- InvestEngine – Great combination of both managed and DIY ETF investment options
- Nutmeg – Excellent all-round platform.
Many of these services now also come with apps, so you can review your portfolio from anywhere with just your phone. Very convenient!
The DIY Approach
For those investors who would rather get in the weeds and pick out their own funds, here are some suggestions for you to consider. Remember that there are numerous options that you can deploy, so in addition to the funds we have already discussed, here are some top picks.
Vanguard Lifestrategy 80% Equity Fund
The Vanguard LifeStrategy 80% Equity Fund is a slightly more aggressive version of the popular Lifestrategy 60% Equity Fund. This fund takes equity allocation to 80% and bonds are reduced to 20%. This fund is suitable to someone who has slightly higher risk tolerance (medium-high tolerance) and also someone who expects to live off this portfolio for a very long time. This could be someone hoping for the FIRE lifestyle, or a retiree who is simply in very good health and still expects to live for 20+ years!
The portfolio’s dividend yield is low at 1.87% but it did deliver total returns of 6.12% over 5 years. The 60% equity fund has a dividend yield of 1.75% with total returns of 4.31% over 5-years.
Of course, the 80% equity fund provides higher returns but also higher volatility owing to its higher allocation to shares. Aside from 2022, which was a terrible year for bonds and balanced portfolios alike, the 80% equity fund generally has performed worse to the downside, but also better to the upside.
This fund is composed of numerous other funds (called a fund-of-funds). On the equity side, the investments are split globally with the US taking the bulk (~26%), UK (~20%), and the Developed World-ex US/UK (~12%). Emerging Markets and Japan have another 10% weight. Bonds make up the rest of the portfolio.
One million pounds invested in the 80% equity fund would deliver annual pre-tax dividend of £18,700 along with additional capital gains of £42,000 (on average). These additional capital gains could be used for income.
Using your capital gains as source of income is a good and tax-efficient strategy in the years when the market is performing well. As long as your withdrawals from the portfolio do not exceed its return for the year, your base capital will never erode.
The OCF of this fund is 0.22%, so you’d be paying £2,200 per year in management fees.
Vanguard UK Equity Income Index Fund (VUKEIII)
Bearing in mind my discussion on total returns vs dividend income, the VUKEIII is a great option if dividend income is at the top of your criteria. The fund has a very healthy dividend yield of 5.34% (as of the writing of this article). This means that on a 1 million pounds portfolio invested solely in this fund, your income would be £53,400.
As with most other Vanguard funds, the fund is a passive fund which replicates the performance of an underlying index – in this case the FTSE UK Equity Income Index. The fund is comprised of 110 UK-domiciled firms. The good thing is that since the fund invests in the UK, your assets are parked in a well-regulated jurisdiction. The negative obviously is that you are fully exposed to the UK market only.
The other negative of course is that the fund sacrifices performance in the sake of providing dividend income. Total returns over the last 5-years (as of writing) were a paltry 3.88%. Additionally, the fund has a minimum investment threshold of £1 million, so you would have to invest your entire portfolio in just this one fund. Perhaps not the most palatable choice for most.
On a positive note, the OCF on this fund is a mere 0.14% so you’re paying only £1,400 a year in fees.
More Options to Generate Dividends
There are an infinite variety of options to generate dividend income. Ultimately it comes down to your interest, time, ability, and patience! Here at PFF, our job is to try and give you the best information. We have published a number of articles, which I think you may find useful for your research:
- 11 Best Investing Books for Beginners
- What Are The Best Vanguard Funds For Your Emergency Fund (UK)?
- Best Vanguard Funds for 60 Year Olds (UK)
- Best Performing Vanguard Funds for UK Investors
I hope you find this information useful. Please feel free to browse our numerous articles on investing in the UK for more information.
by Brianna Johnson
Brianna Johnson, a Miami-based finance veteran, is a wealth advisor for high net-worth families. She loves to write and to share her knowledge. For PFF, she writes in-depth articles on finance and investments that help readers get unique insights. See more.