Investing in stocks can be for different reasons. Some target high share price growth. Others, like me, have an end goal to build up a stream of passive income via dividend payments. I can do this to provide me with funds that I can reinvest back into stocks. Or I can use the income and spend it, or save it for a rainy day. Whatever the goal is, it doesn’t matter too much. What matters is how I use the top dividend stocks to achieve my end goal.
Why I’d invest each month
I’d prefer to invest £500 each month into the top dividend stocks, rather than one annual lump sum. This might seem odd, especially if I have a larger amount of cash in my account ready to invest. The reason I’d look to invest monthly is to allow me to be flexible.
One of the interesting things with dividend stocks is that the fluctuating share price means the potential dividend yield is always changing. Although the dividend per share doesn’t change that often, the share price is a determinant in the yield. So just like I’d try and buy a growth stock at the right time, I should do the same with a dividend stock.
Now I know this raises the question of when exactly is the perfect time to buy a stock. Nobody can time the market to perfection, and trying to do so will only frustrate me. That’s why I’d look to invest a portion each month. Sometimes I’ll buy when the market has fallen, allowing me to pick up a higher yield. In other months I’ll be buying when the market is higher.
On balance, this method of pound cost averaging is a good one in my opinion. It takes a lot of the stress out of investing and trying to time the market.
How top dividend stocks can help me
If I’m happy with my approach, I then need to look to execute it. Investing £500 each month means that I’ll need to wait a while before I receive any decent income from the top dividend stocks that I pick. Yet I shouldn’t let that put me off.
For example, if I select stocks with a 5% dividend yield, over one year I’ll have accumulated £6,000 worth of stock. In year two, this portion will generate me £300 in dividend income.
Going forward, it really depends on what my goal is. If I’m going to spend the money as I get it, my rate of accumulation will slow down. If I’m happy to reinvest the dividends when I receive them, my pot can really grow.
After 10 years of putting away £500 a month and reinvesting dividends, I’d have a pot of almost £78,500. This would then be generating me £3,925 annually in income! Hopefully this goes to show how by putting some money away each month, I can get good long-term rewards from top dividend stocks.