How to Earn $10,000 a Year in Passive Retirement Income

• Reliable dividend payers are a great way to make passive income.
• Dividend growth can make up for investing with a smaller principal.
• Your passive income investments should be diversified to lower your risk exposure.

You’ll either need a decent chunk of change or some patience.

Most people would probably agree that it’s pretty sweet to see cash trickle into your account every quarter, especially if you didn’t need to sell your labor to make it happen. As it turns out, generating passive income in retirement is a lot easier than it sounds, assuming you invest in the right high-quality dividend stocks. 

But what are the things to look for in a potential passive income investment, and which companies are likely to fit the bill for many years to come? Let’s dive in and take a look.

Picking the right stocks for your income strategy

The first order of business is picking a stock that pays dividends and will continue to pay them at the same (or higher) rate for the foreseeable future. In this vein, shares of a major healthcare stock like AbbVie (ABBV -0.20%) are quite attractive for passive-income investors because such companies tend to have a history of consistently distributing dividends and of hiking their payouts repeatedly over long periods.

Furthermore, investors can bet on AbbVie continuing to do both of those things as its business model of developing and commercializing pharmaceuticals is one that’s proven to be both lucrative and viable in a variety of economic conditions. Over the last decade, its trailing-12-month (TTM) net income rose by 275.9%, reaching nearly $12.5 billion, whereas its TTM revenue grew by 216.2% to hit more than $56.7 billion. Importantly, over the last five years, the company’s quarterly dividend grew with a compound annual growth rate (CAGR) of around 17.1%. Even if it hits a few setbacks with getting its products approved for sale, its drug-development pipeline is so massive that it’s hard to imagine AbbVie running out of opportunities for near-term growth.

There’s one other important consideration which retirement-income investors need to know about picking income stocks. Especially if you’re going to be counting on the dividend income to survive, you can’t put all your eggs in one passive-income basket even if it’s into a solid stock. You’ll need to diversify your investmentacross several different companies, so if disaster strikes one of your core holdings, you won’t suffer as much if a company needs to cut its dividend to survive. Aside from AbbVie, Gilead Sciences (GILD 0.19%) and GSK (GSK -1.25%) are two other drug developers which feature similar business models and dividend yields, though their dividend hikes aren’t as favorable, so their future payouts probably won’t be as lucrative. Just remember, the larger and more varied your pool of income sources becomes, the safer your final income stream will ultimately be. 

Here’s how much you’ll need to invest

At the moment, AbbVie’s forward annual dividend is $5.64 per share, which at its current price means its forward dividend yield is near 3.7%. So, you’d need to invest more than $269,541 to get $10,000 per year in gross passive income, which is an unrealistically large amount to have on hand for most people, and an unadvisable sum to drop into any one stock while saving for retirement. To get around this constraint, you could invest gradually over a long period between now and when you plan to retire while also reinvesting your past dividends to take advantage of compounding over time.

If we assume that dividend hikes enable the yield to remain in roughly the same range as it’s in right now over the next 25 years, you’d only need to invest a more manageable sum of around $9,800 per year into AbbVie or (preferably) a basket of stocks with similar yields to get to the same dividend income after that. If the company’s dividend continues to grow as rapidly as it has in recent history, it’s also concievable that investing an even smaller amount annually could accomplish the same result. Alternatively, you can always choose to wait longer before stopping your dividend reinvestment plan, which will mean that you have a larger number of shares to subsequently yield cash.

In closing, building a source of passive income in your portfolio isn’t cheap, nor is it something you can do without a little bit of research into the appropriate investments. Still, it’s hard to argue with the benefit of getting money every quarter for doing very little.