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As I look ahead to the new year, I’m already planning how I can increase the amount of passive income I generate.
Earning additional funds outside of my main source of income gives me some additional security when it comes to my finances. And while this may not seem feasible, it definitely is.
With a very small sum, investors can accumulate a healthy sized pot over time. This is the plan and methods I am using as we approach 2024 and beyond.
Where to start
In my opinion, the best place to start is the stock market. It’s true that, with the UK base rate at 5.25%, some savings accounts are currently offering considerable returns. However, one thing they do not offer is opportunities for growth.
Take the FTSE 100 as an example. Since its inception, it has obtained an average profitability of almost 7%. What’s more, the average dividend yield among its components is a solid 4%.
Footsie is expected to pay out just £80bn to investors through dividends this year. And currently, there are 13 stocks offering returns above the current UK inflation rate of 6.7%.
Selecting the best
What I also plan to do is pick the right stocks. And there are some criteria that I look for when doing this.
First, I plan to target stocks that I believe can provide stable growth.
In addition to that, I also look for companies that have a strong track record of paying out investors. While past dividend payments are not an indication of future returns, a history of payments gives me confidence that the company is likely to pay me in the future.
Additional methods
The last step I plan to take is to reinvest my dividends. This way, I can benefit even more from the power of compounding.
Additionally, I would also diversify my investments across companies and sectors to mitigate risk. By doing this, I am less prone to large fluctuations in certain industries.
what I would buy
So, with the above in mind, what kind of stocks do I plan to buy?
One I’ve been watching closely is Legal and general (LSE: LGEN). With its share price at 222p, it is down around 4% in the last 12 months. In 2023 it has fallen more than 10%.
My main draw for Legal & General is its performance. At 8.8%, it is one of the highest in the Footsie. What’s more, the company is close to completing a cumulative dividend initiative. And as part of that, it plans to return more than £5.5bn to shareholders through dividends next year.
Its dividend has increased steadily over the last decade. Additionally, last year his pay was covered twice by earnings.
Aside from the passive income opportunity, I believe the stock offers ample growth opportunities. Its iconic brand is a strong competitive advantage. With a price-to-earnings ratio in the single digits, it also looks cheap.
The macroeconomic environment has seen its assets under management affected. And as people tighten their belts, this may continue to happen in the coming months. The resignation of its former CEO may also be a cause for concern.
However, I see long-term growth potential. In 2024, I will focus on stocks like Legal & General.
