Building a solid passive income with UK shares is a particularly attractive idea to me right now.
Against a backdrop of high inflation, creating a healthy second income can help take the edge off the rising cost of living and its impact on my wealth.
What’s more, stock market volatility in 2022 has driven dividend yields on many income stocks through the roof. This means I can potentially get an even better return on any money I invest today.
3 dividend stocks I own
Dividend yields have shot up across the London Stock Exchange. And on the FTSE 100, the average forward yield has improved to 4%. This is around half a percentage point better than the pre-pandemic average.
With some good research I can find shares with much larger forward dividend yields than this, too. This gives me the chance to seriously boost my income stream.
These are a few of the dividend stocks I’ve recently bought to earn a larger passive income:
- Rio Tinto (LSE: RIO) (current forward yield: 12%)
- Persimmon (current forward yield: 12.9%)
- The Renewables Infrastructure Group (current forward yield: 5.2%)
Looking past yield
Of course there’s more to buying dividend shares than simply looking at yield. Remember that a company’s yield is based on what dividend payment City analysts are expecting. These projections are not set in stone.
It’s also worth remembering that buying shares for a passive income involves taking a long-term view. A dividend stock that has big yields today might not be a lucrative way to earn passive income later on.
This can happen, for example, if a company operates in a structurally declining industry or has ambitious acquisition plans that requires vast amounts of capital.
A FTSE 100 favourite
This is where the importance of sound research comes in. It can help me separate the duds from the more robust dividend stocks.
Take Rio Tinto, for instance. I think the copper miner’s robust cash flows will enable it to pay a large dividend in 2022 and beyond. That’s even despite the threat that declining commodity prices pose to its profits column.
What’s more, even if the eventual payment fails to live up to that 12% yield, there’s a brilliant chance the miner will still beat the 4% FTSE 100 average by a large distance.
Moreover, I expect Rio Tinto to be a strong dividend payer over the long term. I think earnings will soar over the next decade as the next commodities supercycle begins, driven by rapid urbanisation and investment in green technologies.
Solid passive income
The beauty of seeking to build passive income with UK shares means I don’t need to spend a fortune, either.
Let’s say I find some top income shares yielding around 6%. And let’s suggest I have around £200 to invest in those dividend stocks every month. Doing this regularly would give me a passive income of £144 a year.
Over a decade this would improve to £1,440, over 20 years to £2,880, and so on. And if I choose to reinvest these sums instead of spending that passive income I have a chance to make even bigger returns, too, thanks to the benefit of compounding.