Income stocks provide me with passive revenue through regular dividend payments. These payments are by no means guaranteed, as was highlighted during the pandemic. However, many companies have impressive track records of maintaining and growing their dividend payments over time.
So let’s take a closer look at how I’d invest just £5 a day in income stocks to generate around £8,000 a year in passive income.
My strategy
So I’ve been investing in my strategy for some time. And I use something called compound interest. This is the process of earning interest on my interest by leaving my money invested for the long run.
Essentially it requires me to reinvest the money I receive in dividends. If I keep adding new cash and reinvesting my interest, my money will grow exponentially.
The older I get, the more I’m investing. But when I started, it was with just £5 a day, or £150 a month. So, let’s take a look at how a compound interest strategy can turn that into £8,000 a year.
If I started with £10,000 and invested it in income stocks offering a 5% yield, after 30 years of reinvesting profits, I’d have £44,000. That’s not a bad return at all.
However, if I were to add just £5 a day, or £150 a month, at the end of 30 years, I’d have £170,000. And that’s enough to generate more than £8,000 a year if I still had my money invested in dividend stocks paying 5% on average.
That’s a pretty decent return for just £5 a day.
Of course, the longer I leave it, the more money I’ll have in the end. But in 30 years, I might be looking to retire and that money could certainly help.
My top income stocks
I favour income stocks that operate in industries with longevity, such as banks, wealth management firms and housebuilders, although the latter is pretty cyclical. But it’s likely that companies in these sectors will still be trading in 30 years.
I’d also look at firms like Unilever. The UK-based consumer goods company currently offers a dividend yield around 4%. It’s truly global, selling household-name products in 190 countries and it has defensive qualities so it can outperform when the pound gets weak.
GSK is another attractive offering. It has a 7% dividend yield right now after the stock tanked last week on the back of soaring investor sentiment concerning legal cases over Zantac. But in the long run, I’m backing pharma and biotech stocks.
My favourite stock is Lloyds. UK mortgages represented 61% of its total gross lending at 2021 year-end. And interest rates are rising right now and that’s good for the margins of British banks. But Lloyds has been with us for centuries, and with new stress testing in place, I don’t see it failing any time soon.