Stocks that pay dividends are my main source of passive income. Interest rates have been rising since the start of the year, pushing down share prices across the board. As a result, dividend yields have been going up. As the Bank of England has announced that it would raise interest rates yet again to try to bring inflation under control, I’m seeing a great opportunity to boost my passive income.
Falling share prices, rising dividend yields
I own shares in Starbucks in my portfolio. At the start of the year, the stock traded at $116.68 per share. Today, the share price is down to $73.42.
Over the past 12 months, Starbucks has distributed $1.92 per share in dividends to its owners. For an investor who bought shares at $116.68, that’s a dividend yield of 1.65%. At today’s prices, however, the dividend yield is a much more attractive 2.62%.
That extra yield can make a big difference. Investing £1,000 at 1.65% generates a return of £178.99 after 10 years.
At 2.62%, however, the return is £298.42. In other words, buying shares at today’s prices, compared to the prices at the start of the year, offers a much more substantial dividend return that can compound over time.
I therefore think that falling share prices are producing better opportunities for passive income. Another stock I’m looking at is Lloyds Banking Group, where a 12% drop since the start of the year has increased the dividend yield from 4% to just over 4.5%.
Choose carefully
I think that falling share prices are creating interesting opportunities for generating passive income. I also believe, however, that not all falling share prices are equally good opportunities and that there are risks I need to be aware of.
The Bank of England is attempting to bring down inflation. If it succeeds, that might be bad news for businesses like Rio Tinto and BP, which benefit from high commodity prices.
Equally though, if high inflation persists, then this might present a challenge for companies like Unilever and Burberry. As businesses that fare better when their cost inputs are low, continuing inflation could challenge their profit margins and their dividend returns as a result.
As a result, I think that the falling stock market isn’t without risk for an investor like me seeking passive income. I anticipate some companies having to reduce or stop their dividends as the underlying businesses face challenges.
Ultimately, I think that there are some great opportunities for me to add to my passive income portfolio. Starbucks, in particular, stands out to me at current prices.
I think it’s important to be selective in this market. But if I have a clear view on a company’s outlook, then I think that a falling stock market can be a great opportunity to boost my passive income while share prices are lower than they were at the start of the year.