2020 is a year best forgotten, but this year is already looking good for investors. Stock markets are steady and are likely to remain so. Dividends are coming back. Initial public offerings (IPOs) are in the pipeline. I think this is a good time to consolidate my efforts at achieving financial freedom.
What’s financial freedom?
Financial freedom for me is the ability to afford my life without having to actively earn either a salary or business income.
To me, this means that I have to set up my finances in such a way that my investments do the work for me. To do this, I have to ensure a healthy return on my investments.
How should I become financially free?
I think a straightforward way to do this is by investing in stocks that earn me a passive income. Broadly reliable dividend income that meets my financial requirements would make it possible for me to feel more secure.
The good news is that many FTSE 100 companies make dividend payments. Dividend payouts suffered in the pandemic, but are coming back thick and fast. Just this week three big companies reinstated them – BHP, Glencore, and Barclays.
Investing in banks
Barclays’ announcement earlier today is of particular significance, since it leads the way for other FTSE 100 banks. Banks’ dividend payments were paused on Bank of England’s direction last year as a precautionary measure when the pandemic took root in 2020. The restriction has been lifted and the likes of Lloyds Bank and Standard Chartered are expected to restart dividend payments this year.
Their broadly uninspiring performance at the stock markets and strong correlation with the economy, which has been in slowdown, has kept me at a healthy distance from them in the recent past.
But things are beginning to look up, which is why they are on my radar now.
Miners look good
There are other sectors to look at too. For instance, yesterday I wrote that the idea of a commodities supercycle is doing the rounds. Miners like Rio Tinto, BHP, Anglo American, and Glencore are all stocks that can benefit, if this is indeed the case. So can oil stocks like Royal Dutch Shell and BP.
All these FTSE 100 companies pay dividends, and if we believe in the idea, they can be expected to do so in the foreseeable future as well.
Utilities are stable
Utilities like National Grid, United Utilities, and Severn Trent are also shares I’d consider. With dividend yields ranging between 4% and 6%, and largely consistent share price growth, they would make for good purchases for me.
Risk to consider
The only big risk as I see it is that dividend payouts are always at the discretion of companies. So in a sudden crisis, like the pandemic, a bunch of companies can stop these payments. And I can be left high-and-dry without any source of income. Fortunately, these situations are few and far between. But it is something I need to keep in mind while investing in stocks.