There are various different ways that can I try to make money from stocks. The main two are either from a capital gain due to the share price rising, or from dividend income received from shares. The latter is something I’m increasingly favouring due to the regular income paid out if I choose the right companies to invest in. By building up my allocation to dividend shares over time I can viably look to generate around £1,000 a month.
Sustainable investing
Before I cover the three ways to generate income from dividend shares, I want to briefly run through the sustainability part. There’s no point me generating high levels of passive dividend income this year if the dividend gets cut next year. Also, I want to try and pick companies that I think have a viable long-term future. If I receive income for several years but then sell and the share price has dropped 50%, it negates all the money I’ve received from dividends.
Picking sustainable stocks does have an element of subjectivity. So there isn’t a hard and fast rule. But at a general level, I want to be looking at companies that are profitable over several years. And a good litmus test is to look for companies that continued to pay a dividend last year, despite the pandemic.
Ways to make income from dividend shares
The first way I can use dividend shares to my advantage is simply by investing a lump sum right now. A large enough investment can get me to £1,000 a month on average straight away. How? Well if my average dividend yield is 5%, then investing £240,000 would equate to £12,000 a year (£1,000 a month).
The good thing here is that I can get going fast. Depending on when a specific share goes ex-dividend and pays it out, I could receive my first dividend payment only a few months after making my investment. The downside is that I need to stump up a large amount of money to get started.
The second way is to invest monthly in dividend shares with a regular amount, and reinvest the dividends I receive. For example, investing £1,500 a month would get me to the £1,000 income a month mark after 10 years at that 5% rate. The fact that I reinvest the dividends received allows my investment pot to grow larger at a faster pace.
The benefit here is that I can build up to my goal over time without having to find almost a quarter of a million pounds in one go. The downside is that due to reinvesting the dividends, I won’t be able to enjoy any income for the next decade.
Finally, the last method would be to invest monthly via dividend shares, but enjoy the income as it comes in. Unfortunately, in my example this would add several years to the timeline for me to reach my goal. Yet being able to enjoy smaller amounts of dividend income in the build-up is something I might think is worth it.
Overall, there are several ways for me to make dividend shares work, depending on my personal preferences. The returns aren’t guaranteed, of course, but if I choose my shares wisely, I could look forward to a regular income stream.