Looking at the past and trying to work out how much passive income I could have made from dividend stocks is hard. My dividend yield can vary massively depending on when I bought the stock. It also matters at what point I purchase in relation to the next dividend payment date. Looking forward is slightly easier. So, here’s how I’d try to maximise the potential for dividends with £1,000 right now.
Understanding my goal
There are two possible ways I can look to build an income portfolio over the next year. One is a short-term approach, the other much longer term.
To begin with, I could simply look at how much I could earn by putting my £1,000 to work right now.
The FTSE 100 average dividend yield is currently 4.16%. So, if I purchased all the stocks in the index, the likelihood is that I’d make £41.60 in the next year. It’s only a projection, as some stocks might increase or decrease the dividend per share payments over this period. So, I could receive more or less income when all is said and done.
If my goal is to take this income and spend it, that’s fine. Each year from then on, I should be able to receive another £41.60 that I can take out.
A more viable long-term plan
I’m not a huge fan of the above strategy as it doesn’t allow me to grow my pot over time.
My second idea is to focus on making more dividend income in the next year, but also reinvesting it. Instead of taking the FTSE 100 average yield, I want to invest in half a dozen stocks with above average yields. I’m not going to stretch this too far with mega-high yields, as that can rapidly increase my risk. But I feel I can boost my yield easily to 6%.
This 6% means that in the next year, I should receive £60 in income. My active strategy pays off virtually from day one.
The other tweak I’m making is that with the £60 from next year, I’m going to buy more income shares. This differs from taking the money out and spending it. This extra £60 means my investment pot is worth £1,060, with my potential to earn passive income increasing for the following year.
Passive income ideas
In short, next year I could hope to make between £40 and 60 from dividend income. It’s only a forecast, as the future is an unknown and dividends can rise or fall. This is also taking into account my risk tolerance. I could earn over £100 if I bought just a couple of very high-dividend-yield stocks. However, I wouldn’t feel that confident in receiving that money, so am not targeting that size of return.
Rather than just focusing on the income for next year, I think the key point is what I do with it next. By putting the money back into dividend stocks, my chance of making greater long-term income rises.