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Earning passive income is a priority for many stock market investors, including me. By investing in dividend stocks, shareholders can benefit from regular cash payouts. Encouragingly, many high-yield stocks now offer the potential for better returns than current savings accounts.
But how could you build a passive income empire starting with zero in the bank? What considerations should I take into account when approaching the dividend distribution of my portfolio? And what are some of the risks involved?
We are going to explore.
1. Save
First, I will have to start saving money to make my passive income aspirations a reality.
Although it’s not an easy challenge in the cost of living crisis, my future self will probably be grateful if I save money each month to buy stocks.
An easy way to achieve this is to automate the savings process. Many brokers allow investors to contribute a fixed amount via direct debit each month.
Not only does this mean that investors can gradually begin to build a sizeable portfolio, but maintaining financial discipline through regular investments also helps mitigate the risk of volatility.
Through ‘pound cost averaging’, investors buy shares when share prices are both high and low, smoothing the path on what can often be a journey of uneven growth.
2. Invest
With a savings plan in place, I would focus my attention on which stocks I would like to buy. Since passive income is my primary goal, I would concentrate my holdings on dividend stocks; After all, not all stocks offer dividends.
Fortunately, UK investors are spoiled for choice due to the abundance of high-yield stocks in the market. FTSE 100 and FTSE 250 indexes.
For example, some FTSE shares currently in my portfolio include British American Tobacco (9% yield), Lloyds Bank (6% yield), and centamine (3.7% yield).
Additionally, investors should consider which investment wrapper they wish to use. If the goal is to earn passive income in old age, a lifetime ISA or SIPP may be particularly attractive due to government bonuses and tax relief.
However, if the aim is to obtain readily available dividend income, a stocks and shares ISA might be more appropriate considering this investment vehicle carries no withdrawal restrictions.
Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
3. Diversify
It is important to note that dividends are not guaranteed and capital loss is a real possibility when it comes to stock market investments.
Consequently, to preserve wealth and aim for reliable passive income streams, I would diversify my holdings across a variety of companies and sectors.
Portfolio diversification does not guarantee positive returns. However, it helps limit downside risk by reducing my exposure to a single stock.
Additionally, some investors may find a 100% allocation to stocks too difficult to stomach. Such a portfolio would likely experience considerable volatility.
Diversifying through a mix of dividend stocks and fixed income assets such as bonds could be an attractive option for investors willing to sacrifice some growth potential for a greater chance of portfolio stability.
The bottom line
Ultimately, dividend investing has handsomely rewarded many investors with great passive income rewards throughout history.
Although it is not risk-free, my first port of call when looking for a second income is the stock market. If I were at the beginning of my investing journey, I would follow these steps today.
