The reason I invest is to generate profit. This can be due to share price appreciation, or thanks to picking up dividend payments. I need to balance risk with the reward when contemplating new investments. Yet ultimately, my aim is to maximise my potential profit. When considering passive income from dividends, here’s how I’m trying to squeeze all the juice from the lemon!
Being active in targeting stocks
I see little value in me buying an income fund that pays me the average dividend yield from the FTSE 100. The current index yield is 3.9%. On the face of it, I might think that this is a reasonable payout for my money. But when aiming to maximise my potential, this is merely the benchmark that I’m trying to beat.
At a very simple level, I could increase my dividend potential by putting, say, £400 a month into Barclays with a dividend yield of 4.05%. Clearly, this wouldn’t be a wise choice as all my eggs are in one basket. Yet it goes to show that by steering away from a generic fund, I can gain. Being active in my investment choices should enable me to ramp up my average dividend yield.
High-yield options with diversification
Typically, the companies that have very high yields carry a large amount of risk. For example, Synthomer had a dividend yield of 16.3% until recently. This was based on the dividend payments from the past year. The yield was rapidly increasing because the share price was falling. Even though this looked attractive to buy, the risk was that the dividend could be cut due to the company struggling. The business has now suspended dividends until the end of 2023.
It highlights that even though I want to make my money work hard, I need to be selective in the high-yield options I choose. In order to reduce my risk, I want to put my £400 each month into a range of different shares. Over time, this will allow me to diversify my income portfolio and prevent a dividend cut from ruining my entire income stream.
Given that I’ll be investing for the long term, I’m happy to build up to 20, 30, or even more stocks. I need to ensure I have a large enough amount of money in a company to make a difference. But aside from that, there’s no reason not to keep adding new ones.
Passive income targets
With £400 a month, I feel I could reach an average yield of 7%. Any higher and I think it’s too risky, any lower and I feel like I’m leaving money on the table.
Over time, my regular investing should really add up. Let’s say I manage to stick to this for the next decade, reinvesting the dividends as I get them. After that period, I could sit back and enjoy £4,900 in passive income each year in theory. None of that is guaranteed, of course, but I still see it as a strategy that’s incredibly appealing.
This post was originally published on Motley Fool
