By owning a stock, I become a shareholder in the company. This entitles me to a share of the dividend if the business decides to pay one out. Although I need to be active in deciding when to buy and sell the shares, the dividends are passive income. As long as I am entitled to the dividend, it’ll simply be paid out on the marked date. As a target, I can set myself a goal of making £1,000 in passive dividend income this year. Here are a few ways I can best achieve this.
Investing in a company I believe in
The first way is to find a single income stock that offers me a dividend yield high enough to generate me £1,000. For example, let’s say that I have £10,000 ready to invest. I’d therefore need to find a stock that offered me a yield of 10% in order to satisfy my passive dividend income requirements.
Within the FTSE 100 and FTSE 250, there are half a dozen stocks that offer a yield of 10% or greater. These include the likes of CMC Markets and Ferrexpo.
The risk with this first idea is that even though it ticks my box of potentially making £1,000 this year, it’s concentrated on just one company. If something goes wrong or the business underperforms, the dividend might be cut. As I’ll only own this stock, I take the full negative impact on my future income.
Having a portfolio of dividend stocks
The second way is to look at building a portfolio of stocks for passive dividend income. In much the same way as before, my first angle is to assess how much I need to invest upfront to make the £1,000. For the purpose of the second example, let’s assume I now have £20,000 to invest, so can target an average yield of 5%.
With this aim, I can look to invest around £2,000 in a selection of 10 stocks. I don’t have to pick all of the yields at 5%, but rather mix it up. I can include some of the high yielders that might be high risk. To compensate, I can include stable dividend payers, even if the yield is only 2-3%. The point of all this is that it diversifies my portfolio, reducing the negative impact of any bad news. This should help me to be more likely to achieve the goal of making £1,000 in income this year.
Building up passive dividend income over months
The final way is handy if I don’t have a lump sum ready to go right now. Instead, I can invest smaller amounts over the next few months. However, I need to be aware that this will make things more complicated as I could miss some dividend payments if I’m not a shareholder by a certain date.
The premise here is that I could invest £3,333 now, and then the same amount for the next two months. By the end of the quarter, I’d have the £10,000 in the pot, putting me in the same position as scenario one. The benefit is that it gives me a few months to build up the capital. Personally, I’d also blend in this idea with scenario two via a mix of stocks, not just one.
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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
