Having cash in the bank is great, but if I don’t need it for monthly expenses then I want to try and make use of it for passive income. Putting it in a savings account is one option. Another is investing the cash in the stock market. Sure, this is a higher-risk option. Yet if I’m smart about how I choose to invest, I feel the rewards can also be higher.
Targeting dividend shares
My approach is to take the money and put £2k in dividend stocks and £1k in growth stocks. I don’t want to put all the money in just a couple of stocks, as this will make me very dependent on their performance. Rather, I’d look to invest £200-£300 in each idea.
The dividend stocks should provide me passive income via the regular dividend payments. Even though it’s not a perfect comparison, I can work out the yield as a percentage figure. So if a stock is yielding 6%, I can weigh this up against other options.
Using growth ideas
Although my portfolio would mostly be weighted towards dividend shares, the other £1k can be used in another way. My aim is to pick good growth ideas that should appreciate in value over time. Even though they’re unlikely to pay out income, the share price can compound at a fast rate. It’s not uncommon to have a growth rate of 7%-10% a year.
This is akin to earning a yield, but just not getting it paid out. Then further down the line, I can look to sell some of the gains for a profit and bank this as cash.
A big risk is that by planning years into the future, many unexpected events can happen. This might influence the performance of my portfolio, the yield I’m able to get and the actions I’ll need to take as a result.
An idea to kickstart
As an example, a stock I like the look of right now is British Land (LSE:BLND). The real estate investment trust (REIT) owns a portfolio of properties that are residential, retail and corporate.
From leases and other agreements, the income made from managing this portfolio gets paid out to shareholders. It has a strong track record of doing this over the years. The current dividend yield is 5.82%.
The business operates a tried and tested operating model. So looking forward, I don’t see any reason why this couldn’t provide me income for at least the next decade. With the share price also up 8% over the past year, I feel this reflects growing optimism about the UK property market recovery.
As a risk, the stock is sensitive to the broader economy. Any kind of prolonged recession would likely see tenants potentially default on payments, which could impact the overall cash flow for British Land.
In terms of numbers, let’s say I could have an average yield of 6% on my overall portfolio. With £3k in the pot and any income reinvested, the value would grow over time. Let’s assume that I top it up with an extra £500 each quarter. After a decade, my pot could be worth £32.6k. This means that in the following year, I could look to enjoy £1,958 in income.
This post was originally published on Motley Fool
