Generating income from stocks is a smart investing strategy. If the income can be passive in nature, then even better. This isn’t always possible, but even if you have to put in a little effort to make the money, it’s usually worth it! Most investors are aware of dividend income, and see it as the main source of income from FTSE 100 stocks. This is true, but there are other ways that you can get paid from the investments you hold.
Dividend income
This is the main way that investors generate income from FTSE 100 stocks. Even if it takes some homework in the beginning, the process of receiving dividend income is very passive. To begin with, pick a stock you wish to invest in that you know pays out dividends. By calculating the dividend yield of the stock, you can work out exactly how much income you’ll receive. For example, if you invested £1,000 in a stock with a dividend yield of 5%, you’d get £50 a year in income.Â
The flexible element of receiving income this way appeals to investors. You can decide the stock to invest in. As a result, you can pick the dividend yield (and income level) you want. Provided the firm doesn’t cut or reduce the dividend, you can then sit back and wait for the money to roll in.
Taking profits
The second way to generate income from your stock investments is to regularly trim profits. This was introduced to me many years ago by a friend. It has worked well for him for a long time. He held a lot of stocks in his portfolio, and a couple of times a year would sell some of his best performing stocks. For example, if he owned £1,000 worth of a stock, which was valued at £1,500 at the current share price, he would sell £200 worth. He still had £1,300 in the stock to ride higher if possible, but would take some profits out as income.
By doing this a couple of times a year, you can create a good income stream.
Reinvestment income
The third way to generate income from stocks is to reinvest both the profits and dividends you receive. This may seem counter-intuitive – after all this is income already. But one of the most sustainable ways to make a high amount of income in the long-run is to reinvest funds to begin with. For example, if you took the £200 profit from the share mentioned above, you could invest it into a 5% yield dividend stock. This reinvestment then generates you income. This is a legitimate way to make income, and is particularly satisfying as it’s entirely funded out of profits generated.Â
Generating income from stocks
A lot of focus is put on dividend income, and rightly so. This is the most passive way to generate income. However, using your profits as income, or getting income from reinvestment is also viable. Ultimately, in this low-interest-rate environment, putting your hard earned money to work is the main thing!