I really like the idea of creating a passive income using dividends from UK stocks. Let me tell you why. For me, a passive income is about having enough side income to pay for treats. I don’t have any aspirations to be the next Warren Buffett, but I do want to enjoy nice meals out safe in the knowledge I can comfortably afford it.
Don’t get me wrong, I’m under no illusions around generating consistent passive income from UK stocks. If it was easy then everybody would already be doing it! I do believe, though, that if I put the work in, alongside listening to informed opinions, I can create a steady passive income stream for myself.
Why UK stocks, though, and not something like buy-to-let?
I know there are other ways to generate passive income other than investing in UK stocks, but I don’t think they will work for me. Arguably, the most popular alternative method in the UK this century has been through investing in buy-to-let property, but the good times seem to have gone there.
The introduction of 3% stamp duty on second property ownership in 2016, followed by changes to mortgage tax relief in 2017, has eroded the profit of landlords in recent years. That’s before even considering the up-front capital needed to purchase a buy-to-let property. All in all, I’ll pass.
Investing in UK stocks: realistic and accessible
I feel like I have a more realistic chance of creating steady passive income from UK stocks. Buying and selling shares is more accessible than ever before, and I don’t need a daunting minimum spend to get started.
Partly, I’m inspired by an old adage about saving that I was first told at school: “Spend 70% of your earnings, save 20%, and give the rest to charity”. Now whether or not I stick rigidly to those percentages is up for debate, but the general idea seems fair enough to me.
The key difference is that, with interest rates at an all-time low, I don’t think putting all my savings into a bank account is going to be very helpful. I’d rather take a calculated risk that I can make my money ‘work harder’ by redirecting some of my regular savings into high-yield UK dividend shares. Not all my savings, mind you: I know I need to balance my potential risk.
Some UK dividend shares strategy I will pursue
Some UK companies switch to paying extremely high dividends because without the dividend, the business looks an unattractive investment, for whatever reason. I probably won’t seek to invest in this kind of company, as there is too much risk associated with the share price falling.
I will instead look at companies with a strong track record. While I know that past performance is no guarantee of future performance, and that dividends are never guaranteed, I will get some comfort knowing that a business has been a strong performer. A company like Coca-Cola immediately springs to mind here. I am sure I can find some more if I do my homework.
