There are plenty of ways to start earning a passive income. But with £9,000 in the bank, the fastest and easiest is to put this money to work in the stock market. Investing in businesses comes with risks. But by focusing on mature, established enterprises that are financially healthy, it’s possible to unlock a steady stream of dividends. And in the long run, these can grow significantly.
Investing for dividends
When a company reaches the multi-billion pound territory, it gets much harder to expand further. And while there are always exceptions, most industry leaders typically end up paying dividends to shareholders when they can’t find any meaningful internal growth investment opportunities.
The good news for British investors is that the FTSE’s filled with income-generating stocks. And since dividends can be a strong indicator of strength or weakness, businesses almost always try to maintain or even grow their payouts. This attracts more investors, driving up the stock price and making it easier to raise capital in the future should the firm need to.
Dividend hikes increase the yield, which, in turn, increases the passive income. The FTSE 100 index has historically offered a payout of around 4%. But many of its constituents offer considerably more. By building a custom income portfolio, it’s possible to achieve a 6% yield while still keeping risk in check.
Initially, £9,000 at 6% translates into a £540 passive income. But left to compound for 10 years, this could almost double to just over £980. And that’s not even considering the extra returns from capital gains or future dividend hikes.
A top-notch 6%-yielding stock?
Looking across the UK’s flagship index, BT Group (LSE:BT.A) currently offers a dividend payout just shy of 6%. And with such a handsome reward, it’s not surprising that the company’s a popular destination for income-seeking investors. So is it a sensible investment for me?
Beyond the attractive yield, BT has numerous desirable traits that income investors love to see. It’s an established enterprise with a well-known brand that plays a critical role in everyday life. After all, without its fibre broadband infrastructure, most UK households wouldn’t have access to the internet even when using other providers. And this reliance paves the way to strong cash flow generating capabilities originating from both consumers and businesses alike.
However, these advantages are ultimately made irrelevant due to the state of the balance sheet. Expanding and maintaining telecommunications infrastructure isn’t cheap. And when paired with years of mismanagement, the firm has found itself under tremendous financial pressure from its £23.5bn pile of debts & equivalents.
By comparison, the company only has a £14bn market capitalisation. And as of March, half of operating profits are being gobbled up by interest on its borrowings.
To the firm’s credit, a shake-up in leadership and strategy has led to some significant progress this year. The group’s completed a £3bn annual savings programme earlier than expected. And new CEO Allison Kirby has subsequently announced another £3bn of savings to be unlocked by 2029.
These milestones will undoubtedly free up more profits to start paying down the overleveraged balance sheet. However, with interest rates now significantly higher compared to a few years ago, it could take a long time. And, right now, I think there are lower-risk income opportunities to be had elsewhere.
This post was originally published on Motley Fool
