Buying dividend stocks is a simple strategy that investors can implement to generate passive income. Dividend stocks not only provide shareholders with regular cash dividends, but also offer the potential for capital appreciation.
According to the latest ONS data, the average annual salary after tax in the UK is £27,573 – we think it’s possible to earn that amount in dividends by investing just £10 a day.
Here’s how I aim to achieve that goal:
Accept the risk
Dividend investing involves risk. Stock prices can crash. Dividend income may not keep up with inflation. Plus, dividends may be cut or eliminated altogether, so payments are not guaranteed.
Having a solid emergency fund in cash, carefully researching potential investments, and diversifying your portfolio across different companies and sectors are smart ways to mitigate potential pitfalls.
But ultimately investors have to get used to risking their capital, because after all, on the other side of the coin is the potentially huge reward: a significant lifetime passive income.
Compound return
So how long would it take to earn £27,573 a year in passive income at £10 a day?
There is no exact answer to this question, it depends on the compound annual growth rate (CAGR) of my portfolio and the total return of my overall stock market holdings.
Currently, the average dividend yield is FTSE 100 The stock yield is 3.6%. Since I will only invest in dividend stocks, I aim for a higher overall yield of 5%.
This means you’ll need a portfolio worth £551,460 to reach your target passive income stream: As the table below shows, even a small improvement in your portfolio growth rate can significantly reduce the time it takes to build up sufficient wealth.
|
Average annual growth rate |
Time taken |
|---|---|
|
Four% |
49 years and 4 months old |
|
6% |
39 years and 2 months old |
|
8% |
33 years 0 months |
|
Ten% |
28 years and 8 months old |
Smart ways to boost your profits include reinvesting dividends and choosing a commission-free broker. You can also use a Stocks and Shares ISA to protect your portfolio from the tax man, or a SIPP to reduce the tax on your investments.
Please note that tax treatment depends on each client’s individual circumstances and may change in the future. The content of this article is for informational purposes only. It is not intended to be, and does not constitute, tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
Dividend Idea
Now, let’s look at what dividend stocks an investor like me could buy.
High-yielding stocks are obviously attractive, but they often carry more risk than Dividend Aristocrats, which have a history of solid dividends.
Other options include exchange traded funds (ETFs) and real estate investment trusts (REITs). Of course, there are great benefits to diversifying and combining all of these.
For example, one of the dividend stocks I own is a major FTSE 100 pharmaceutical company. GSK (LSE:GSK).
There’s a lot about the company that has value investors excited: It trades for 10.3 times forward earnings, which is much lower than some of its major competitors, including: AstraZeneca.
Moreover, the dividend yield of 3.7% is plenty high, and more importantly, the forward dividend yield of 2.6 times earnings suggests a generous margin of safety.
To be sure, the business faces considerable challenges. A recent US court decision has allowed 75,000 personal injury lawsuits against the company to proceed, which could result in huge damages for the company. The plaintiffs claim that GSK’s heartburn drug Zantac It causes cancer.
Litigation aside, GSK recently raised its full-year outlook, and demand for its blockbuster drugs for shingles, HIV, and respiratory diseases should remain strong regardless of economic cycles.
Overall, I think this is a stock worth considering as part of a diversified passive income portfolio.
The article How investing £10 a day could generate £27,573 a year in passive income first appeared on The Motley Fool UK.
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Charlie Carman has investments in AstraZeneca and GSK. The Motley Fool UK recommends AstraZeneca and GSK. Views expressed on companies mentioned in this article are those of the author and may differ from official recommendations we make in subscription services such as Share Advisor, Hidden Winners or Pro. At The Motley Fool we believe considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
