With US growth stocks in free-fall, dividend shares and the passive income they can generate are proving to be a popular refuge from volatility. Even some UK shares are being impacted by the prospect of a prolonged trade war, yet that’s also pushed dividend yields much higher. And providing those dividends can keep flowing, investors may be looking at a rare opportunity to supercharge their passive income.
So let’s say an investor has £10,000 to spend. How much income could they unlock right now and in the future?
Profiting from higher yields
Today, the FTSE 100 offers an average yield just shy of 3.8%. Yet it’s actually the FTSE 250 offering the higher payout right now at almost 4%. So if an investor were to just snap up shares in a low-cost index tracker, a £10,000 investment could instantly start generating £400 a year.
Alternatively, instead of relying on an index fund, what if investors were to just split the £10,000 across the 10 highest-yielding income stocks in the FTSE 250? In that case, the dividend yield would average out to a massive 11.9%, or £1,190.
But that’s just right now. What if investors were to reinvest these dividends over time and grow the income portfolio? Assuming yields stay the same after:
- 5 years – £18,077 portfolio generating £2,151 passive income.
- 10 years – £32,678 portfolio generating £3,888 passive income.
- 20 years – £106,790 portfolio generating £12,708 passive income.
Let’s be realistic
There’s no denying that the prospect of using £10,000 to earn more than £10,000 every year in the long run is exciting. But there are some pretty large assumptions going into this calculation. Firstly, yields never stay the same since they’re affected by stock prices that change constantly (for better or worse).
What’s more, high yields are only attractive if the dividends can keep flowing. And across the top highest-yielding FTSE 250 stocks today, there are plenty of risks that could prevent that from happening. Take Ithaca Energy (LSE:ITH) as an example.
The oil & gas producer offers a 13.9% payout right now as its production efforts ramp up, beating analyst expectations in 2024. This momentum has seemingly spilt over into 2025, putting the firm on track to continue growing earnings and dividends despite recent weakness in oil & gas prices.
Dividends being backed by earnings is an encouraging sign. However, if that’s the case, why aren’t more investors taking advantage? There are undoubtedly several factors at play. However, one of the biggest concerns is the location of Ithaca’s operations.
With new development projects located in the North Sea, the company’s facing increasing political, legal, and activist pressure that could result in its long-term growth becoming compromised. And if earnings dry up, dividends are likely to follow.
The bottom line
There are a lot of passive income opportunities in the stock market right now, especially as prices tumble on fears of a global trade war. However, it’s essential for investors to do plenty of research when looking for stocks to buy, even among historically ‘safer’ dividend stocks.
This post was originally published on Motley Fool
