Generating passive income streams is a key objective for many investors. I’d follow a simple 3-step plan to achieve this goal by investing regularly each month in FTSE 100 and FTSE 250 stocks with high dividend yields.
Here’s how I’d aim to earn passive income from UK dividend stocks.
1. Getting started
The first step in my plan would be to set a savings target and stick to it. Saving and investing under £5 per day should still yield a total cash distribution that I’d be pleased with.
With objectives set, portfolio optimisation is my next consideration. To protect passive income streams for life, I’d shelter my investments in a Stocks and Shares ISA. This ensures all capital gains and dividend payments are tax-free.
Finally, I’d start researching dividend stocks to buy before investing £150 per month. In reality, this is an ongoing process. Thorough due diligence is prudent, particularly in periods of elevated share price volatility.
2. Buying dividend stocks for passive income
Now I’m set up, it’s time to start investing. Let’s explore two dividend shares on my watchlist.
Legal & General (LSE: LGEN) is a financial services and asset management firm. Down 8% over 52-weeks and -14% in 2022, the Legal & General share price strikes me as oversold. Indeed, the FTSE 100 company’s price-to-earnings (P/E) ratio of around eight suggests it’s a value investing opportunity. I’m especially keen on LGEN stock’s reliable dividend distribution history as well as the current 6.8% dividend yield.
For FY2021, Legal & General delivered post-tax profit over £2bn — up 28% year-on-year. It’s on track to achieve its cumulative dividend ambition of £5.6-5.9bn by 2024. The business isn’t immune to the threats of high inflation and a possible recession, which could dampen demand for the company’s insurance products. However, in my view, LGEN looks like it could provide shareholders with decent returns from here. I consider Legal & General shares an excellent choice for passive income.
Moneysupermarket.com (LSE: MONY), the online price comparison business, is a FTSE 250 dividend champion, currently yielding 6.5%. The Moneysupermarket share price has experienced heavy selling in recent years — it’s nearly halved over five years and is down 20% in 2022.
Moneysupermarket might be a rare beneficiary from the cost of living crisis as consumers seek out the best deals. However, the latest financial results reveal some weakness. Adjusted EBITDA fell from £141.5bn in 2019 to £100.5bn in 2021 and basic earnings per share declined to 9.8p from 17.7p over the same period. Nonetheless, dividends have increased or remain unchanged for six years in a row. I believe Moneysupermarket shares would make a good addition to my passive income portfolio despite the risks.
3. Compound interest
My aim is to build a diversified portfolio covering a range of market sectors. Taking Legal & General and Moneysupermarket as indicative of my envisaged overall holdings, with a fiver-a-day’s investment, I’d expect £120+ in annual passive income after just one year.
It’s tempting to spend the income, but I’d strive to reinvest as much as possible within the tax-free ISA wrapper. This would allow me to take advantage of the power of compound interest with a view to building a sizeable dividend portfolio over time from small everyday savings.