There are many different ways that I can try to make passive income. These can relate to various different asset classes, including property and bonds. One of my favourite ways is to use dividends. When looking at well-established FTSE 100 companies, I can take my £1,000 and put it to work straight away.
Types of stocks for passive dividend income
Income going into my bank account happens when a company pays out a dividend to shareholders. As long as I’m listed as a shareholder before the cut-off date, I’ll be able to receive this payment. Dividend payment sizes do change even from the same firm, as they’re based on the performance from the past half-year or full-year.
However, in order to show stability to income investors, some companies look to maintain a set dividend per share or even grow it slightly over time. These are the type of stocks I’d look to buy within the FTSE 100 for my passive dividend income.
On the flipside, I need to watch out for companies that have an erratic dividend. This won’t help me accurately plan for the future as the income I receive will be constantly changing. Although it might sound obvious, I also want to avoid stocks that offer a small dividend yield of 1% or less. These stocks might be good for capital growth, but when just looking for income, it isn’t where I want to allocate my £1,000.
Making use of my £1,000
I might think that the best thing to do is invest my £1,000 in a couple of my favourite picks for passive dividend income. But I wouldn’t do this. I think this would leave me a bit too exposed to the two firms. Instead, I’d look to diversify my income prospects by investing in half a dozen different shares.
So if I want to diversify my dividend income, then why don’t I buy a dozen stocks? The main reason I wouldn’t go to this other extreme is that transaction costs can each into my money. Not only might I have to pay an upfront transaction cost, but there will also be the difference in the buy and sell rates (known as the market spread) to consider. Ideally, I want to avoid buying and selling lots of stocks to reduce my overall costs.
Within my £1,000, I’d look to mix up the dividend yield that I’m targeting. The average FTSE 100 yield is currently at 3.47%. So I’d be looking to buy a couple of high-yield stocks offering 5%-8%. Offsetting this risk, I’d consider buying a couple of stocks with yields around 2%-3%, which should fall into the low-risk category.
By blending the stocks all together, my average yield should carry with it less risk than just buying one or two stocks with the same yield for passive dividend income. Overall, FTSE 100 stocks offer me a good opportunity to make passive income via the dividends paid out over time.