I try to be strict with myself when setting targets to save and invest money. If I don’t set aside a portion of my salary each month, like 10%, then it’s very easy for me to forget and simply spend the funds instead. Some say that investing a set percentage of income (rather than a fixed monetary amount) into dividend stocks is a better way to go for the long term. This is because our earnings should hopefully rise over time. So saving a percentage allows our investments to rise without having to change our overall spending habits.
Why invest in dividend stocks?
This is probably the first question that’s popped into your head. Of course, I could invest 10% of my salary into various other assets. But I want to build my income pay-outs, and invest smaller amounts on a regular basis. A buy-to-let property would get me income, but would need a large initial outlay. Investing in gold would allow me to buy-in monthly, but wouldn’t pay me any income. Buying gilts or corporate bonds would pay income, but often have a large minimum size requirement.
Investing in dividend stocks ticks both boxes. I can invest £10 into a FTSE 100 stock if I wanted to. My dividend pay-out would be very small, but it shows the point! The stocks that do pay out dividends usually do so a couple of times a year, but different companies pay out on different months. So if I bought a dozen dividend-paying stocks, I realistically could be getting paid income most months.
Time for the calculator
According to the latest figures from the ONS, the average salary from full-time employment in London (where I live) is £38,272 a year. So in a month, my gross earnings before tax could be around £3,200. If I set aside £320, I’d target high-dividend-yield opportunities right away.
I wrote a piece earlier this week showing how I can get a 6% dividend yield investing in a mix of British American Tobacco, GlaxoSmithKline, and Rio Tinto. I don’t feel these stocks are particularly risky, and so would feel comfortable starting here when investing in dividend stocks.
My £320 a month would give me £3,840 after a year. At this point, I’d get £230 a year in dividend income. Not huge money, but already enough to make a difference. At this point, I can either decide whether to take the income and spend it as I get it, or reinvest. Reinvesting the dividends will boost the overall value of the stock portfolio, and quicken the pace of getting to a particular number (e.g., £100k).
However, if I just wanted to get the money to enjoy it now, that’s not a problem. Each year, my dividend income would get higher and higher. After eight years, I’d be getting paid £150 a month as passive income. As a second income stream from my main salary, I’d be happy with that. The figure could be even higher, as I’ve not factored in my salary increasing over time (which I hope it would).
As a bottom line, I think that dividend-paying stocks are a great way for me to generate passive income even with a modest portion of my monthly salary.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.