In a country with high inflation and a rising cost of living, I want to make my cash work hard for me. The concept of putting my money to work without having to actively be involved is known as passive income. Two of the popular methods are buying a property and letting it out, or buying stocks that pay out dividends. Here’s why I prefer the second option.
Investing almost any amount
One of the main reasons why I like using dividend stocks for passive income is that I can manage the amounts easier. If I have £1,000 ready to go, I can build a portfolio around that. Even if I can only spare £100, I can still invest in stocks.
With buy-to-let, the minimum investment amount is much higher. If I can’t afford to reach this minimum threshold, I can’t access the income that this type of investment can provide.
Aside from the upfront amounts, I also like the fact that I can top up my exposure to the shares whenever I want. This makes it appealing to setup a monthly amount that I can chunk away and invest.
Having control over my investments
Another reason why I prefer using dividend stocks as the way to make passive income is due to the control I have. I can look at the dividend yields on offer at the moment and choose the ones to invest in. If a company stops paying a dividend in the future, I can easily sell it and put my money in another stock that is paying.
Other alternatives such as property have their undeniable virtues, but they don’t have the ease of moving in and out of investments due to a lengthy timeframe for selling.
I should note that if I pick my dividend shares poorly, then I may have to rebalance my income portfolio on a regular basis. In this regard, it might no longer really be a passive commitment, and might take up a lot more of my time than I initially expected.
Stocks I like for passive income
Given the need to pick sustainable dividend shares for income in the future, which stocks should I select? Personally, I’d filter for companies with a track record of payments. I’d also add to this filter a requirement to include sectors that I believe in for the future.
For example, I think the utilities sector will continue to have resilient demand in years to come. I’d therefore consider buying stocks including National Grid and Severn Trent. Even though the yields are currently around the FTSE 100 average of 3.5%, the sustainability of these payments is what I think is attractive.
Alongside this, I’d select some passive income stocks from banking. Both Lloyds Banking Group and NatWest currently offer me yields in excess of 4%. Even though the banking sector did cut dividends during the pandemic, this was a temporary measure enforced by the regulator, rather than an active choice by certain banks.