Key points
- Passive income can be achieved through dividend investing
- High yields aren’t always sustainable
- I’m building a diversified portfolio of UK-based companies
Passive income is money earned while we aren’t working. Building a consistent stream isn’t easy and takes years of dedication. But it’s not impossible. I could start a business, or rent out property. But neither of those options will start generating passive income right away and they also involve some extra work. The best way I know how to achieve my aim is with dividend investing.
Dividend investing
Dividends are payments made to shareholders from a company’s profits. These payments can be issued once, twice, or even four times a year, and they’re generally indicative of a company’s profitability. Dividend investing is a method by which investors construct a portfolio of dependable firms that provide a consistent dividend that can then be reinvested. This technique is quite popular in the UK, and we’ve witnessed record-high dividend yields in recent years. Some have even gone as high as 13% or 15% of a share’s value!
Yields and sustainability
These high rates, however, are typically unsustainable in the long run. For example, in 2019, mining firm Evraz paid 53p per share, representing a staggering 13.39% of the share price. But the company only paid 42p in 2017 and nothing in 2015 or 2016.
The average payout of big listed corporations in the UK is roughly 4%. This year BAE Systems and Unilever are scheduled to allocate 4.05% and 3.97%, respectively. But it’s important to understand that no firm is required to raise, retain, or even pay a dividend. The importance of consistency can’t be overstated.
Portfolio size
I figure I’ll need a total pool of £125,000 to meet my monthly objective of £400 in passive income. 4% of £125,000 is £5,000. That’s £416.60 if I split it over 12 months.
While I don’t have that kind of cash on hand, if I set aside £350 every month, I’ll be able to attain that magical figure in roughly 30 years.
Granted, 30 years is a long time, but if I start investing that money immediately, compound interest will help me get there sooner. Now all I have to do is pick a few businesses in which to invest.
My preferred companies
While the goal is to seek out secure organisations I can trust, I believe it’s worthwhile to take a few chances in order to accelerate my pot’s growth. I’ve already written about Imperial Brands. Since 2002, the tobacco firm has issued a substantial dividend to its stockholders at least twice a year. Today’s yield is a fantastic 8%.
I’m not overly concerned if it decides to reduce its dividend payout because my plan’s benchmark is 4% over 30 years. Anything over that is a bonus. However, I believe it’s critical that I don’t rely only on this technique and instead diversify my portfolio with smaller-yield firms.
Lloyds Bank pays a dividend of roughly 2.37%, lower than my target return, but banks are generally stable businesses. Finally, I’d go with Unilever as it’s a huge, prosperous firm that now pays almost 4%.
None of this is guaranteed though. Investing always entails risk. The essential thing for me to do in that case is to diversify my portfolio so that I can weather any storms and build towards my passive income dream.