Building passive income should eventually give me more freedom in how I spend my time. This is because the additional income I receive will mean that I will be able to choose if I work more hours to finance my lifestyle.
Here I’m going to outline my 10-year plan to generate a substantial stream of passive income from dividends.
<h2 class="wp-block-heading" id="h-why-stocks“>Why actions?
When people talk about “earn money while you sleep”, refer to passive income. Obviously, this is the opposite of active income, which involves getting paid for the work I do.
Today, the Internet allows for several ways to generate additional income streams, including dropshipping and affiliate marketing.
But is that income really passive?
I mean, affiliate marketing will involve creating, updating and optimizing my site(s) to keep it(s) ranking high on search pages. There will be marketing agencies that represent the companies my site is affiliated with and they may want me to periodically update my promotional content.
Hmm, that sounds more like a second job to me.
But when I invest in dividend stocks, I get paid simply for holding them. I don’t have to update anything. Cash flows into my brokerage account as I go about my daily life. Therefore, dividend investing is truly passive.
Better yet, if I pick the right stocks, they could also gain value over time without me lifting a finger. For example, McDonald’s has increased its annual dividend for 47 consecutive years. And its share price has also skyrocketed.
So with this action, there has been an increase in income. and capital growth. A win-win combination!
my strategy
In summary, my plan has only three elements:
- Save money to invest every month.
- Invest in top dividend stocks that offer high returns
- Reinvest the dividends to buy even more shares.
First, like clockwork every month, I need to deposit money into my stocks and Shares ISA. This means that all dividends and profits you generate will be tax-free.
Ideally, then, I would like to maximize the £20,000 contribution limit each year, although this will depend on my circumstances. But my commitment to do it is there, even if I have to make sacrifices along the way. After all, I’m playing the long game.
Secondly, I am going to invest in high quality businesses. That means they have strong competitive positions and resilient cash flows to pay dividends to shareholders. And I’m looking for companies without too much debt on the balance sheet, especially now that interest rates have risen dramatically.
Ultimately, no single dividend is guaranteed. But by filtering for companies with the desirable qualities mentioned above, I have a better chance of success.
My target dividend yield range is 5% to 9%. Fortunately, due to low share prices caused by poor investor sentiment, the UK market today boasts a wealth of high-performing shares.
Finally, I will reinvest my cash dividends instead of spending them. This way I get more stocks that pay more dividends, and so on. This will enhance the effects of compound interest.
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.
Enjoying the rewards
Now, my passive income plan is the opposite of a get-rich-quick plan. For that, it would be better if I invested all my money in lottery tickets or dark cryptocurrencies. But I prefer not to lose all my money taking those risks.
So how much passive income could you enjoy after 10 years?
Well, assuming I invested my entire ISA allocation of £20,000 a year and generated a 7.5% annualized return, I’d end up with around £292,550 (excluding platform fees).
From this 7.5% yielding portfolio, I expect to receive around £22,000 a year in tax-free passive income. This goal is why I invest every month.
