UK dividend stocks provide me with a good opportunity to generate passive income. Yet I need to remember that with any investment, there are risks and common pitfalls. If I can minimise these as much as possible, it gives me the best opportunity to avoid unnecessary losses and expenses. With that in mind, here are several passive income mistakes that I want to avoid in advance.
Passive income still needs effort
Firstly, I want to avoid having the mindset that UK dividend stocks offer me guaranteed income. Hopefully, the stocks I buy will offer me a regular dividend stream over the coming years. But unlike a bond investor, there’s no contractual obligation for a company to pay out a dividend. The payment is usually made out of the profits from the previous year. Several companies had to cut the dividend during 2020 as a result of the pandemic.
I just need to be conscious that UK dividend stocks can vary the payment over time, and build this expectation into my planning regarding passive income.
Another common mistake with ‘passive’ income investing is thinking that there’s no work involved at all. The income may be passive, but this this isn’t like buying an index tracker and I have to pick my stocks carefully. Obviously, there’s less work involved in UK dividend stock investments that in active buying and selling like a day trader. Yet there’s still some work involved.
The main element I need to research and plan comes at the start. I need to pick the right stocks according to my dividend yield requirements and the company outlook. This can take a fair amount of time, and constitutes active work from my end. Once this is done, the maintenance is limited.Â
Patience needed with UK dividend stocks
Another mistake that can crop up is the assumption that no rebalancing of my dividend portfolio is needed over time. This isn’t the case. Over the years, there are several reasons why I might need to buy and sell different UK dividend stocks.
For example, I’ve already spoken of how dividends might be cut. In this case, I’d need to find a new company to invest in. Apart from this, I might find a new stock that I think offers me good passive income potential. In this way, I might be better off selling an existing stock for this new potential.
Whatever the reason is, over time I will need to alter my portfolio. This is normal and I shouldn’t think that I’ve failed in my goal just because I need to tweak things.
Finally, a common mistake I always have to be aware of is a desire for higher income in a short period of time. In other words, I want more and I want it now! I think many would share this desire as it’s human nature. Patience is the answer here. UK dividend stocks will pay out usually a couple of times a year. So it’s only with the passing of time that I can expect my income to accumulate.
Overall, UK dividend stocks are a good investment option, but I do need to watch out for some pitfalls.