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Passive income ideas: why dividend stocks remain my favourite way to bank cash

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There are several different types of passive income ideas. All of them have the same principle, to try and generate cash on a regular basis in a non-active way. The activeness refers to the level of effort that I have to put in as the investor. In a perfect world, I could invest in something and completely forget about it, while enjoying the benefits of the income. This extreme is almost impossible, but as far as truly passive income ideas go, dividend stocks are my favourite.

Low minimum investment size

Unlike other passive income ideas that require a large amount of upfront cash, dividend stocks don’t have this hurdle. This means that I could invest a nominal amount like £10 in a stock if I wanted to. This makes the concept of dividend income from stocks appealing to people regardless of their cash balance.

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Clearly, the more I invest, the larger the amount of passive income I’ll receive. But what I like about the low minimum investment size is that I can build up my pot over time. For example, I could invest £100 a week and do this for years. This is a huge benefit in my opinion. It contrast to investments such as bonds or property that can have relatively high minimum deposit or investment amounts in one go.

The downside of a low minimum is that the passive income from dividend shares won’t make a difference in the beginning. If I invest £100 a month in shares yielding 4% a year, I’ll only be making £48 in the first year.

The passive income idea with flexibility

Another point I like is that I have control over the amount of passive income I make from this idea. This is because I can easily calculate the dividend yield that I’ll be getting from a particular stock. If the yield (and the income) isn’t what I’m looking for, then I can look into a different one instead.

At the moment, within the FTSE 100 the dividend yields range from 0% to 12.87%. So I have a lot of choice to target particular dividend shares depending on my goal. If I’m looking for low risk and sustainable income then I can target companies that fit this bill. Alternatively, if I want to achieve a yield of 6% or 8%, then I know I’m going to have to take on higher risk. 

Whatever my goal is doesn’t really matter too much, the benefit from this passive income idea is the flexibility that dividend stocks give me.

Points to consider

One of the main risks with using dividend shares for passive income is that the future payments aren’t guaranteed. If a company has a bad year (like 2020), then management can decide not to pay out any income to shareholders. This could dry up my income considerably depending on the stocks in my portfolio.

On balance, I do feel that as far as passive income ideas go, investing in dividend shares is one of the best.

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jonathansmith1 and The Motley Fool UK have no position in any shares mentioned. 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.

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