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By putting some leftover savings into dividend stocks, it's possible to establish passive income streams that help put some profits from blue-chip companies into our own pockets.
If I had extra money today (say, £9,000), here are three steps I would take to kickstart a long-term goal of £1,794 of passive income each year thanks to that approach.
Step 1: Convert savings into investment capital
My first step would be to set up a shares trading account or stocks and Shares ISA, and then deposit the £9,000 into it.
That way, as soon as I found stocks to buy, I would be ready to take action.
I say 'shares' because no matter how much I liked an investment opportunity, I would spread the £9,000 across a range of stocks to reduce my risk if one did poorly. It happens.
Step 2: Choose stocks to Buy
Next, I would begin the process of finding stocks to put in my portfolio.
With thousands of companies listed on the UK and US markets alone, it can seem daunting to decide where to start.
My approach would be to stick to business areas that I understand and believe have the potential for long-term gains. I would then focus on companies with a proven business model and competitive advantage that I believe could help them continue to generate excess cash to fund dividends for years or even decades to come.
A share of income to consider
As an example, a stock that I think passive income investors should consider buying is itv (LSE: ITV).
He FTSE 250 The station has a legacy business that continues to generate profits from advertising. Over time, that may decline and the cost of increasing digital operations could eat into profits.
But for now, the business continues to generate significant excess cash and the company has also been building out its digital offering.
As well as that part of the business, the other half of ITV is a studio and production business. That helps protect you from the ups and downs of advertising demand, as you can make money by renting your facilities and services to a wide range of program creators.
Currently, with ITV's share price in pennies, the dividend yield is 6.8%.
Step 3: Increase Passive Income Streams
Imagine you invested the £9,000 with an average return close to that, 7%. Although about double FTSE 100 On average, in today's market I think that can be achieved.
So 7% of £9,000 is £630 per year. As a passive income startup, I think it's pretty reasonable.
But I could try to do better. a lot Better: taking a long-term approach. This is due to a simple movement, known as capitalization. That simply means using the dividends I earn to buy more shares.
Imagine you compounded my dividends over 15 years at an average annual rate of 7%. After 15 years, you should be earning approx. £1,794 in passive income every year.
