Aside from trying to make money via share price gains, I can use dividend stocks to generate income. This income can go towards offsetting my monthly bills, as well as being stashed away to save up for a nice holiday. I estimate that I’d need £4,000 over the course of this year to achieve this. With that end goal, here’s how I’m trying to get there.
Dividend stocks I’d include
First, let’s consider the dividend stocks that I’d actually want to buy right now. Fortunately, the average FTSE 100 dividend yield has been moving higher over the past year. Even outside of the FTSE 100, there are some attractive companies worth considering.
In order to aim to make £4,000 this year, I need to be targeting an average yield of 8%. This means that I need an investment pot of £50,000. Given the size of my pot, I can afford to diversify in a variety of stocks, with yields above and below this mark. As long as my average comes to 8%, I’m good.
Commodity stocks have performed very well recently, as I wrote about here. Given my positive outlook, I’d include stocks such as Rio Tinto and Anglo American. These currently have dividend yields of 9.31% and 5.28% respectively.
I’ve also noted the positive trading update this week from Taylor Wimpey, and think that other firms in the property sector could have a strong 2022 with good forward order books in place. As a result, I’d buy Persimmon with a 9.12% yield and Taylor Wimpey with a 5.16% yield.
Finally, I think that financial markets will be volatile this year due to Covid-19 uncertainty, political issues in the UK and global tensions with China, Russia and others. Therefore, I’d consider buying retail trading platform providers such as CMC Markets. The business currently has a dividend yield of 10.5%.
Making the numbers work
There will be a perfect balance that needs to be struck when investing my £50,000. I don’t want to invest too much in dividend stocks with a low yield, as this will make it impossible for my to hit 8%. However, I don’t want to be too greedy and invest more in higher-yielding stocks, perhaps to chase £5,000 in income this year.
This is because usually the higher the dividend yield, the higher the risk is. The risk is primarily that the business will cut the dividend per share at some point in the future. After all, this group of dividend stocks should provide me with the income in 2022. Yet there isn’t any guarantee that the money will be paid. It’s at the discretion of the management team to decide whether a dividend will be paid or not. That’s true for low-risk stocks as much as higher-risk ones, of course. To achieve my target, that might mean I’d need a larger investment pot.
With all that in mind, I’d prefer to find a balance between all of the stocks that I’ll be buying. This helps to diversify my risk, so that if one stock does struggle, I won’t see my income for the year drop by thousands. By taking out as much risk as I can, I’ll hopefully be able to count the money coming in later this year.
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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.
