Ever thought about replacing a wage with passive income? One option is the stock market: British shares pay out tens of billions of pounds in dividends each year.

So, if someone decided they wanted to set up passive income streams so they could retire early, what might it take?

First question: what’s the goal?

To start with, it is helpful to figure out what that passive income may need to be.

That depends on an individual’s lifestyle, which can change after retirement. It also depends on how much flexibility they want to build in – for example, keeping a close handle on living costs, or allowing for some extra money in case they decide to splurge.

Another thing to consider is inflation. What makes for a liveable income now may not be enough in 10 or 20 years to maintain the same lifestyle.

In this example, I will use trade body Pensions UK’s ‘moderate’ annual income for one person of £31,700.

Second question: what’s the portfolio yield?

How big a portfolio needs to be to deliver that depends on the average yield obtained.

At the current FTSE 100 yield of 3.1%, £31,700 per year of dividends would require a portfolio worth £1m.

At a higher yield of 5%, that figure would fall to £634,000.

I see 5% as a realistic yield to aim for in today’s stock market while sticking to proven blue-chip shares.

Still, even the best company can disappoint and no dividend is ever guaranteed to last. So it is important to keep the portfolio diversified to aim for the target.

Third question: how soon to retire?

There are quicker and slower ways to hit that target portfolio size.

For example, putting in £1,000 a month, it would take 52 years. That would not help someone retire early!

Putting in £2,000 a month, that falls to 26 years. At £3,000 each month, it would be 17 years.

Things could be sped up by reinvesting (compounding) dividends along the way.

For example, putting in £2,000 per month the goal takes 26 years to hit. But if that £2,000 per month is compounded at 5% annually, it falls to 17 years. That alone could bring retirement almost a decade closer!

Fourth question: what investing platform to use?

Someone needs a practical way to invest in the stock market.

Whether it is a Stocks and Shares ISA, a SIPP or some other platform, keeping a close eye on costs and fees can help when aiming for the goal of building the portfolio size.

Fifth question: which shares to buy?

Building the portfolio also matters.

One dividend share I think investors should consider is homeware retailer Dunelm (LSE: DNLM).

It currently offers a 5.7% yield. Dunelm also has a good track record of paying handsome ordinary dividends and supplementing them with special dividends when it has spare cash.

That is no guarantee of what may happen in future, of course. One risk I see is rising shipping costs leading to higher prices for imported goods. That could hurt Dunelm’s profit margins.

Still, the company is solidly profitable and I expect that to remain the case over the long term.

Demand for homewares is resilient and Dunelm has keen pricing and many unique products. I see it as a share for investors to consider.

Should you invest £5,000 in Dunelm Group Plc right now?

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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Dunelm Group Plc made the list?

Christopher Ruane has no position in any of the companes mentioned.