Passive income is something that most investors try and achieve to some degree. The ability to enjoy payments from my investments without me having to exert myself lets me use my time in other pursuits. This could be with other money-making ventures or simply personal pleasures. The main way I try to generate passive income is via top dividend shares. Here’s how I do it.
Thinking about the bigger picture
Firstly, I always look ahead and think about what I’m trying to achieve with a particular dividend share. There are several points that I need to think about.
For example, how does the particular dividend share fit in with my overall income portfolio? I want to avoid being overly concentrated in one particular sector in case something negative happens there.
I also want to think about how the stock will help my larger goal of getting to four figures a year in passive income. If the current average dividend yield of the shares I hold is 5%, should I really be buying a share with a yield of 2%? This will drag down my overall yield, and might not be the best choice.
However, if the company has low volatility, a sustainable dividend, and an outlook to increase the dividend per share, the yield might not be a large problem. So although I look into each share specifically, my main concern is how it fits in with the rest of the stocks that I own.
Getting income from top dividend shares
To make four figures in passive income a year, it goes without saying that I need at least four figures invested into top dividend shares in the first place! The exact amount depends on what my average dividend yield is. The higher the yield, the less I need to have invested.
For example, on the low side let’s say I wanted to make £1,000 a year in passive income. With a dividend yield around the FTSE 100 average of 3%, I’d need to have £33,333 invested. But if I increased my yield to 5%, then I’d need just £20,000.
If my four-figure requirement was higher, then the numbers get larger. For example, if I wanted to make £9,000 a year with a yield of 5%, I’d need a fairly sizeable pot of £180,000 invested.
If I wanted to be at the higher end of the passive income scale, then I’ll need patience. I don’t have £180,000 ready to invest in top dividend shares right now. But I can invest smaller amounts monthly to build up to this level several years down the line. This could be a viable option for me to consider.
Overall, I need to think about my end goal of how much income I want to try and make before I get started. Doing so will impact the shares I buy and the yields that I target.