To supplement the stocks that I own for the purpose of capital growth, I like to hold stocks that generate income. In this way, I can focus most of my efforts in trying to generate outperformance on the active side of my investing ideas. The passive-income investing side (once up and running) should require only a little attention to work well for me. Here’s a few ways that I can get dividend stocks to help me out.
A lump sum
The first way I can go about passive income investing in via a large lump-sum investment. For example, let’s say I get an inheritance windfall or have sold my house and am downsizing. This surplus amount can go straight into dividend shares that can offer me regular income.
Making £450 a month this way would be fairly simple. If I assumed I could get an average dividend yield of 6%, then I’d need to make £5,400 a year. To generate this, I’d need to invest a lump sum of £90,000.
This probably isn’t the most popular way to go about passive-income investing, as such events to accumulate a large amount of money in one go are slim. But if this happens to me, it’s definitely a viable way to make things work.
The benefit of this idea is that I get to put all the money to work in one go. The downside is that I’m overly concentrating my focus purely on dividend stocks. A wiser idea in my opinion if I had such a lump sum would be to put half of it in dividend stocks, and use the other half for other ideas.
Passive income investing in chunks
A second way I can get to £450 a month via passive income investing is by buying dividend stocks each month. I won’t be able to generate sizeable dividend income straight away, but it will build up over time.
For example, let’s say I invest £1,000 each month into stocks I am positive on. I’ll assume again that I can get around a 6% dividend yield on average. I’ll also presume that I reinvest any dividends I get paid. In this case, it would take me just over six years to achieve my goal. At this point, my investment pot would be at that £90,000 figure, allowing me to then enjoy the £450 a month on average from passive-income investing.
The benefit of this idea is that I can manage my cash flow better. Putting away a chunk every month is an easier way for me to manage my finances, and puts less stress on it. The downside is that I will need to wait for several years before I get to start enjoying the passive income. I can solve for this by not reinvesting the dividends, but this will lengthen the time by a year and a half.
Whichever way I decide to invest, it’s clear that I can make a success of passive-income investing, and make it work for me.
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Jonathan Smith has no position in any of the shares mentioned. The Motley Fool UK has 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.
Motley Fool UK 2021