This is a good time to earn a passive income from stocks. Companies have slowly been increasing dividend amounts, after the debacle that was last year. As a result, I now have more choice to select from when buying dividend paying stocks. In fact, dividend yields are so high that I actually have the opportunity to earn double-digit yields on my investments now.
Assessing how much to invest
If I target earning £100 in passive income each month to start with, I need to work backwards to figure out what my investment amount should be. This depends on the dividend yield, which is the dividend amount earned in a year as a proportion of the current share price. It follows that the higher the dividend yield, the better my passive income from the stock in question.
Fastest way to get to £100
At last count, I found at least three FTSE 100 shares that have a double-digit dividend yield. These are all metal miners: Evraz, BHP, and Rio Tinto. Consider the biggest dividend payer among these, Evraz with a yield of around 12%. To get an monthly passive income of £100 from the stock, or £1,200 annually, I would need to invest £10,000 in it. This translates into a monthly investment of £833.
Similarly, I can work out the amount I need to invest in BHP and Rio Tinto to earn a passive income of £100. Since their yields are between 10% and 12%, I need to invest anywhere between £833 and £1,000 each month to achieve my passive income target in a year.
The catch to earning high passive income
The catch to these investments is that they need to be watched. Miners have paid good dividends historically as well, but now is a particularly good time for them. The commodity boom of last year earned them bumper profits, which translated into higher dividends. But some correction is widely expected to be due now. This could be reflected in their future dividends, which might not be as high. Dividends are never guaranteed, and can always be cut or reduced.
What I can do instead
With this information, I can react in two ways. Either I can adjust my passive income expectations or I can hunt for other stocks that will earn me double-digit yields. I can look at the longer-term trend in these companies’ dividends to get a sense of how much I am likely to earn over, say, the next five years. In the case of Evraz, for instance, I could still come out ahead because its average five-year yield is 10.8%. But for Rio Tinto, it is somewhat lower at 6.2%. Even that is not bad, but it does indicate that the stock will probably not consistently earn me £100 in passive income each month on average.
Alternatively, I could look for high dividend yield stocks outside the FTSE 100 set. FTSE 250 stocks like Ferrexpo and CMC Markets are two such examples. Based on my assessment of the time-frame for which I want to invest and how much these stocks could yield for me, I can make my decision.
