How I’m aiming for £500 a month in passive income from dividend stocks

Various denominations of notes in a pile

Passive income from dividend stocks. Who wouldn’t like that? It’s certainly something I’m keen to achieve.

That’s why I’m aiming to build a portfolio of shares capable of delivering £500 a month in passive dividend income. It could potentially provide a valuable component of my income in retirement. And I’m planning to achieve it by investing in – wait for it – dividend stocks!

Slow and steady can win the race

I reckon a strategy based around reinvesting dividends is hard to beat. Slow but steady gains can compound into meaningful progress over time. However, nothing is certain in the stock market and all shares carry risks. It’s possible for me to reinvest dividends for years and still lose money if I pick the wrong shares in the first place.

But what are the wrong shares for a dividend-based investment strategy? For me, they are shares with too much potential for dividend cuts, deletions, or setbacks. But it’s not always obvious which ones to avoid because some high dividend stocks have well-known and respectable businesses.

Take the banks such as Lloyds, NatWest, and Barclays for instance. Despite their chunky yields, they’d never make it into my long-term dividend portfolio. The cyclicality in the industry is massive. And bank stocks can deliver famine or feast outcomes for investors. The dividend is often an early casualty when bank stocks are heading into a general economic slowdown.

But cyclical sectors aren’t the only areas to avoid. I tend to view any dividend yield above 7% with suspicion. Often a high yield like that can be more of a warning than an attraction. Rather than troubled businesses, I look for dividends backed by strong and stable enterprises operating in defensive sectors. Indeed, the least cyclicality there is in the firm’s operations, the better.

That means I’m often searching in sectors such as utilities, energy, fast-moving-consumer goods, food supply, IT, technology, and others. But that’s not enough qualification on its own. As well as operating in a defensive sector, a business must have strong finances, a decent record of trading, and decent forward-looking prospects. Only then will I become interested in a dividend stock.

Compounding gains from dividend stocks

And it almost goes without saying that the valuation must be attractive before I’ll buy. But pinning down a decent dividend yield is often halfway towards finding an attractive valuation. And that’s one strength of the strategy.

The process of compounding works exponentially over time. And that’s why my plan involves compounding dividends and other gains for a long time. In the later years of a programme of compounding steady gains, the annual gains can be meaningful. And they need to be. Because £500 a month passive income from dividend stocks requires a share portfolio worth around £150,000 by my estimate. That’s assuming an overall dividend yield of 4%, which seems realistic.

However, I believe it can be achieved by people like me on an average salary. And the key is for me to start the compounding process as soon as possible and to keep going.

The post How I’m aiming for £500 a month in passive income from dividend stocks appeared first on The Motley Fool UK.

Here’s a good place to start my research:

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

More reading

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Leave a Reply

Your email address will not be published.