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The idea of making money without working for it is understandably popular. This is known as passive income. It may sound like a pipe dream, but a common and practical way to earn passive income is to invest in dividend-paying stocks.
To illustrate this, here is a detailed overview of how you would invest £300 a month in dividend stocks if you wanted to aim for an average of £2,000 each month in additional income.
saving regularly
I’m using £300 as an example, but actually the approach could work with any amount. However, investing more or less will speed up or slow down the rate at which I hope to reach my goal.
What I think matters is setting an amount that is achievable, given my own financial circumstances, and then getting into the habit of regular, disciplined saving.
To do that, you’d set up a stock trading account, or Stocks and Shares ISA.
Dividend Stock Purchase
The cornerstone of my plan is to buy stocks that I hope will regularly pay me passive income in the form of dividends.
That income would come in the future, of course. So I wouldn’t just look at a company’s dividend history to decide if it suits my approach. Rather, I would try to find large companies with healthy balance sheets that I thought could generate substantial amounts of excess cash in the future and use it to pay dividends.
For example, a consumer goods company Unilever owns premium brands that give it pricing power. It operates in an area where I expect to see high customer demand in the future. So hopefully you can continue to generate a lot of excess cash that you can use to pay dividends.
spread my risks
But what happens if Unilever fails, for example, because cost inflation eats up its profits?
Even great companies can struggle. As a long-term investor I think in years or decades. In that period of time, not only is it possible that some stocks I own could hit a rough patch, but I consider it likely.
Of course, I would still strive to select high-quality companies with attractive stock prices to build my passive income streams on. But I would also make sure to branch out into a range of such companies.
Building towards my goal
Over time, I expect my passive income streams to grow. Not only would you continue to invest regularly, but you could also reinvest the dividends. That’s known as compounding, and it could help me build my future dividend income faster.
Although this is a long-term project. Imagine that I invest in stocks with an average dividend yield of 5%, for example. Even if I compound dividends, it will take 42 years before I have a large enough portfolio to generate my monthly goal of £2,000 in monthly passive income.
That is a long period of time. But along the way I was able to develop a disciplined saving habit, learn about successful investing, increase the size of my portfolio, and hopefully increase regular dividend streams over time. If I decided not to compound them, I could start using those dividends as passive income on a day-to-day basis.
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