Dividend stocks are one avenue I like to use to generate passive income. Passive income enables me to make money without having to put in a lot of effort. So I can keep trying to make profits from more active stock picking that requires more research. If I mix the two together, my overall pot should be able to work harder for me than just doing one or the other.
Passive income from dividend stocks
One element that makes dividend stocks attractive for passive income is yield. Technically, I make passive income on my Cash ISA, but the amount is negligible. For companies that pay a dividend, the income can be generous.
I calculate this by looking at the dividend per share versus the share price. This is known as the dividend yield. The higher the yield, the more I squeeze the lemon.
I have to be careful with high yields because sometimes it can be too good to be true. A falling stock price can drive up the dividend yield for a period of time. But the ailing company (hence the share price) may have to cut dividends in the future. This would then reduce the dividend yield.
So, to get a sustainable passive income from dividend stocks, I want to be sensible. The FTSE 100 The average dividend yield is just under 3%, which I think is still attractive. If I am selective I would like to aim for a 5% return without having a very high level of overall risk.
Crack the numbers
With a sustainable dividend paid out into the future, I can now turn to thinking numbers. Let’s say I want to make an average of £ 100 a week in passive income from dividend stocks. It has to be an average as dividends are often paid once or twice a year. Even if I bought a dozen stocks, I would have trouble getting a payment every week!
From here all I have to do is plug in the numbers and work backwards. I know my return is 5% and my final goal is £ 100 per week (£ 400 per month). For a lump sum investment, I would have to buy shares worth a total of £ 104,000.
The story goes on
That sounds like a lot to buy all at once. An alternative route could be to build the passive income target from dividend stocks. I could invest £ 1,000 a month and reach my ultimate goal in seven years.
From my point of view, it makes sense to work on my goal for a few years so as not to burden my liquidity too much. So I would rather choose the second option. In any case, I can show that it is possible to generate good dividend income in a passive way.
The post How To Invest In Dividend Stocks To Go For A Passive Income Of £ 100 A Week First appeared on The Motley Fool UK.
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jonathansmith1 does not hold a stake in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. Views about the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our subscription services such as Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that taking a variety of insights into account makes us better investors.
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