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Last year, the banking giant HSBC distributed £8.4 billion in dividends. Some of that was for institutional shareholders. Some went to strategic investors. And a good chunk of it went to people who own HSBC – and other UK shares – mainly because of its passive income potential.
In fact, many investors focus their passive income efforts on purchasing shares of proven blue-chip companies that typically pay dividends to shareholders.
This can be lucrative, although like any investment, it carries some risks.
Below I outline how an investor could aim for an average income of £2,000 per month, either now or in the future, by purchasing UK dividend stocks.
Doing dividend calculations
To start, I will explain the mathematics.
£2,000 a month is equivalent to £24,000 a year. The amount someone needs to spend on stocks to earn will depend on the average dividend yield of the stocks they buy. Dividend yield is basically the dividends earned annually as a percentage of cost.
So, for example, with a 5% return, you would need to spend £480,000 on shares to reach your passive income target.
That's a lot of money. But one good thing about the current valuation of many UK blue-chip shares is that it means the yield can be quite attractive.
While the FTSE 100 The average yield is 3.6%; In today's market I think it's really possible to aim for 7% while still sticking to quality companies.
Why a long-term approach can help
Still, even at 7%, the initial investment required would be substantial, around £343,000.
But for those who are serious about creating passive income streams and are willing to take a long-term approach, there is another way, even starting from scratch.
For example, let's say an investor puts £860 per month into the stock market and the capital compounds at 7% (by reinvesting the dividends initially).
After 18 years, the portfolio will be large enough that, with a 7% return, it can generate over £2,000 each month on average as passive income.
Find stocks to buy
I said I think a 7% yield is realistic in today's market.
One of the UK stocks that I had in mind in that context and that I think investors should consider is British American Tobacco (LSE: BATS).
There is clearly a big risk here: the company makes most of its money selling cigarettes and demand for them is declining in most markets.
Still, although it is in decline, it is still huge: British American sells billions every week. Thanks to its portfolio of premium brands, it has pricing power that allows it to finance a large dividend.
The yield currently stands at 7.9%. British American also has a history of increasing its dividend per share annually for decades, although that doesn't necessarily mean it will continue to do so.
Although cigarettes are a declining market, sales of non-cigarette products are growing rapidly. I think British American's well-established brands can help it do well in that space.
Getting ready to invest
One thing I haven't mentioned above is the practical aspect of how to get started.
That would require a way to buy UK shares, such as a trading account or stocks and Shares ISA.
With many options available, an investor can find it profitable to take the time and research what seems best.
