What Income Will Your Capital Actually Produce?

Every question about passive income is the same question wearing a different number. How much for $500 a month? For $3,000? For a six-figure income? They all reduce to one line of arithmetic, and once you can do that arithmetic yourself you stop needing the individual answers.

This is that arithmetic, the capital each target actually requires, and the honest limits of the assets people use to get there.

The formula everything reduces to

Required capital = annual income target ÷ portfolio yield.

That is the whole thing. A 4% yield on $300,000 pays $12,000 a year, which is $1,000 a month. The same 4% on $900,000 pays $36,000, which is $3,000 a month. Nothing about the mechanism changes as the number grows; only the size of the base does.

Because yields are quoted annually, always convert your monthly target to a yearly one first, then divide.

What each income target actually costs

Here is the capital required at four realistic yields. The 3% column is the conservative end — dividend growth funds with a long record. The 6% column buys the same income for a third less capital and takes materially more risk to do it.

Two things are worth sitting with. The first is that $3,000 a month — the point at which passive income covers a median mortgage and utilities for many households — needs somewhere between $600,000 and $1.2 million. The second is that anyone promising you a safe, permanent $3,000 a month from a $50,000 or $100,000 portfolio is describing a yield of 36% to 72%. That is not an aggressive strategy. It is arithmetic that does not work.

What the yield column costs you

Moving down the table from 3% to 6% looks free. It is not.

An unusually high yield is frequently a warning rather than an opportunity. A yield rises when a share price falls, so a number far above its peers often means the market expects the payout to be cut.

The assets people actually use

Government debt. US Treasuries and UK Gilts have paid roughly 4% to 4.8% in the recent high-rate environment, with near-zero risk to principal. The catch is that the payment is fixed: it does not grow, so inflation erodes what it buys every year you hold it.

Dividend ETFs. These hold hundreds of dividend-paying companies, so one company cutting its payout is a rounding error rather than a hole in your income. Two are worth knowing by name. SCHD tracks the Dow Jones U.S. Dividend 100 and screens for companies that have paid a dividend for at least ten consecutive years, at an expense ratio of 0.06% — $6 a year per $10,000 invested — yielding roughly 2.88% to 3.3%. VYM is broader, holding over 600 stocks from the FTSE High Dividend Yield index. Dividends from funds like these have historically risen over time, which is the inflation protection government debt does not offer.

REITs. Property exposure without owning a building, typically around 5%. Highly sensitive to interest rates.

Covered call funds. The 6%+ column. They sell away part of the upside to raise the payout, which means more cash now and less growth later.

The 4% rule, and where it stops applying

The 4% rule comes from the Trinity Study and was built for a 30-year retirement beginning at 65. Used that way, a $1,000,000 portfolio supports roughly $40,000 a year, adjusted annually for inflation, with the portfolio expected to survive.

It is not a universal constant. If you retire at 55, the money has to last 35 to 40 years rather than 30, and planners commonly reduce the initial withdrawal rate to between 3.25% and 3.5% to account for it. On $2.5 million that is the difference between $87,500 a year at 3.5% and $75,000 at 3%.

What smaller sums genuinely produce

It is worth being concrete, because this is where expectations break.

$100,000 is the milestone Charlie Munger called the hardest to reach, and it pays somewhere around $333 a month at a sensible yield. That covers utilities or groceries indefinitely. It does not replace a salary, and the gap between those two facts is where most disappointment lives.

For sums at this scale the useful move is usually not to spend the income but to reinvest it, so the base grows toward a figure that can eventually fund something.

What is not passive income

Dropshipping, automated storefronts and AI-run "faceless businesses" are sold as passive income. They are businesses. They require daily operational effort, and the ones that work are second jobs with better margins, not yield.

The distinction that matters: you either buy passive income with capital, or you build an asset with labour. Yield-focused investing is the only version that genuinely requires nothing of you once it is set up — you open an account, buy the asset, and collect the payment.

AI can make the labour side faster. It does not remove it.

Tax, briefly

In the US, interest from bonds and savings is taxed as ordinary income, while qualified dividends and long-term capital gains are taxed at lower rates. In the UK, income generated inside a Stocks & Shares ISA is shielded entirely.

This changes the answer materially. A 4% yield taxed at 40% is a 2.4% yield. Before optimising which asset pays the most, check which wrapper it sits in.

Work it out for your own number

The table above stops at the figures people search for. Your number is probably not one of them.

Use the compound growth calculator to put in your own starting capital, contribution and return and see what it becomes. Then run the result through the inflation-adjusted simulator, because a $3,000 monthly income thirty years out does not buy what $3,000 buys today — and that gap is larger than most projections admit.

If you want the specific income products available where you live, with their real yields, minimums and lock-in periods, compare the options in your market.