I am aiming to build a passive income stream of around £1,000 a month. One asset I plan to focus on to achieve this aim is dividend shares. Indeed, I believe buying dividend shares is one of the most straightforward ways of achieving a regular income.
That said, as dividend income is paid out of company profits, it should never be taken for granted. If a company’s profits suddenly decline, the business may have to reduce its distributions to investors. Shareholders are usually the first to suffer if a corporation sees a sudden drop in profitability.
However, despite this drawback, I believe the strategy still has tremendous potential.
Passive income strategy
To earn a passive income of £1,000 a month, I estimate I will need to build a large financial nest egg in the first place. I believe I can buy a portfolio of stocks and shares with an average dividend yield of 5%. If I invest around £300,000, I estimate I could earn a passive income of approximately £13,000 a year at this rate of return.
There is a bit more to my strategy than just buying stocks yielding 5%. I am targeting companies at both ends of the income spectrum. Enterprises that offer dividend yields of more than 5%, and less than 5%. I believe this style will help me build diversification into the portfolio and reduce the impact of any dividend cut on my income stream.
Some examples of the organisations I will be buying for my portfolio include Phoenix Group, which currently supports a dividend yield of 7%. Over the past couple of years, this company has proven itself as a dividend champion. It manages a portfolio of pension and life insurance assets to generate cash to return to investors.
Another company I would buy at the other end of the yield spectrum is the generic pharmaceuticals business Hikma. With a yield of less than 2%, this stock is not a traditional income investment. Nevertheless, with profits set to rise substantially over the next few years, I reckon there is plenty of room for the payout to expand further in the years ahead.
While I would buy both of these stocks today for passive income, I should note they are not immune to the risks I have outlined above. If either firm suffers a fall in profits, they may decide to slash their investor payouts.
Dividend shares for the long run
That is the strategy I plan to use to generate a passive income of £1,000 a month. Unlike other income strategies, this approach does not require a lot of work. All I need to do is select a portfolio of stocks, and then I can sit back and let these companies take care of themselves.
That is another reason why I have decided to follow this approach.