There are plenty of different ways that I could choose to put a spare £1,000 to work. Some investments would offer me a focus on capital appreciation, or capital preservation. In some ways, I might like to try and simply beat the rate of inflation. But what about if I want to target income accumulation? In this case, I’d look to invest in top dividend stocks. Here’s how I’d do it.
Starting at the end
To begin with, I’d want to actually look at my end goal. This might seem to be the wrong way around of looking at things, but bear with me. My end goal for my £1,000 could be to build up the income and reinvest it to a target of £2,000. Or it might be to make the money sweat enough to generate me £50 a month in passive income.
Depending on what my goal is, will impact how I go about making the investment.
Once I’ve got my goal figured out, I then need to think about how I can get to it. For example, if my goal is to reach £100 a year in passive income, then I know I’ve got to somehow get a 10% dividend yield across the companies I invest in. By thinking about the numbers, it can help me to figure out quickly whether my goal is too ambitious or achievable.
Looking at specific top dividend stocks
After I’ve made the numbers add up, I then want to drill down into the specific companies I’m going to invest in. This is an important step as I’ll likely have various top dividend stocks to choose from. For example, let’s say I need to achieve a 4% dividend yield for the next decade. There are currently 22 different FTSE 100 stocks that I could pick that fit the description.
From the 22, I want to look at what specifically makes one a top dividend stock. The yield is one element, but other important factors include the dividend cover and the dividend outlook. After all, the dividend yield is a backward-looking number generated from the last dividend that was paid out.
In this way, I can hopefully prevent (or at least minimise) some downside risk. This risk would be that the dividend stocks I invest in cut the payment in the future. This would reduce my passive income and hinder my pursuit of reaching my goal.
Buy and hold
Once I’ve picked the selection of dividend stocks that I want to invest in, I’m almost finished. I’d decide whether I wanted to split my £1,000 evenly into the different stocks, or rather increase my allocation to a particular share for some reason.
From there, I’d buy the stocks and wait for the next dividend payment date to receive my first income amount, while also accepting that dividend income isn’t guaranteed.