Income stocks are those that pay out a dividend to an investor. The FTSE 100 and FTSE 250 are full of different income stocks that I can choose from when considering an investment. So here’s how I’d go about trying to generate an income next year.
Trying to ensure dividends are paid
I’m looking ahead at how I can make £1,000 in 2022 and in my opinion, one of the most important things to look at with income stocks is how reliable the payments will be in the future. Next year is a complete unknown that might cause some companies to halt dividend payments and unlike bond coupon payments, dividends aren’t guaranteed. Year-on-year, dividend payments can rise or fall depending on how well the business is performing.
Therefore, I want to try and identify stocks that give me the best shot at getting paid next year (and beyond). This isn’t an exact science by any means. But I can look at the past few years and see what the track record is. I can also look at how well the business has done in 2021, as the dividends will likely be based on this performance. Finally, I can assess the outlook for 2022 and make a judgment call on how well I think the sector could do.
Diversifying income stocks
I need to think about diversifying the shares that I choose to buy. It’s fine having a list of a dozen names that I think are sustainable, but what if they’re all in the same sector? It wouldn’t be the smartest idea to invest in all of them.
Even though the stocks within one area might be brilliant choices, putting all my eggs in one basket could end up costing me. For example, I might have picked a host of dividend stocks within the banking sector in 2019. Yet in early 2020, the regulator requested banks to stop paying out dividends to help aid cash flow during the pandemic. So if I only held income stocks from this area, I’d be stuck. Rather, I’d prefer to pick a couple of shares from several different industries.
Considering the numbers
Another important point is look at is my cash situation. If I want to make £1,000 next year from dividends, I’m going to need to invest a larger amount than £1,000.
The easiest way to think about things is to consider how much I’d need to stump up today. If I presumed an average dividend yield of 5%, then I’d need to invest £20,000. This assumes that I’ve picked sustainable income stocks that will continue to pay out in the future.
Of course, this isn’t an option for me at the moment. Alternatively, I could invest month-by-month. This method wouldn’t generate £1,000 in year one. But if I want to make £1,000 in dividend income next year, a monthly plan would get me there. And if I want to enjoy the income in five or 10 years’ time, investing regularly each month should help me build a generous pot in the long term.