Who doesn’t like the sound of using dividend stocks to make a fatty second income? Sure, it requires some work to find which shares to buy. And of course it also requires regular investment.
But with these obstacles overcome, UK shares can be a great way to make a healthy passive income. Here are the steps I’d take to start boosting my wealth from scratch.
#1: Get saving
“You have to speculate to accumulate“, as the old saying goes. Fortunately however, trying to make a passive income through stock investing isn’t as money-draining as some imagine.
This is particularly critical today as the cost-of-living crisis worsens and the amount of spare cash we all have dwindles.
Trying to generate passive income by buying rental property requires phenomenal up-front costs. So can setting up a business as a side hustle, or ploughing capital into someone else’s start-up.
By comparison, putting aside just several pounds a day can allow me to build a healthy dividend income. This would quickly build up and, after several weeks, allow me to start building a UK shares portfolio.
Let’s say I can save just £5 a day. Over a month, that’d give me around £152 to spend on dividend stocks. Or £1,825 to spend each year. And so on…
#2: Do some research
The next step is one that puts many people off investing in UK shares. But doing proper research is critical if I want to make a decent return on my cash. And also to avoid being left with a great big hole in my pocket.
Let me cite the example of Cineworld. The leisure stock had a track record of paying above-average dividends leading up to the pandemic. And as Covid-19 exploded in early 2020, and its share price collapsed, the company’s dividend yield shot to around 8.5%.
Yet many investors who bought Cineworld shares around that time have been burned. The company’s enormous debts forced it to suspend dividends altogether in 2020 as it closed its cinemas. And I can forget about it restarting dividends any time soon. Instead, it remains in a fight for survival (although if it does survive, it might one day pay off).
Fortunately, it’s never been easier for investors to find great stocks to buy. There’s a wealth of information available from investing websites like The Motley Fool. Share investors can also get investment ideas from trading platforms via e-mail and through the post.
#3: Watch the wealth build
Thanks to the miracle of compounding, share investors could receive an annual return of 8% over the long term. Many of those who are extra diligent with their research can make an even better profit on their investment (although some also do less well).
For good wealth-boosting returns I think doing thorough research is well worth it. And the following illustration shows just why.
Let’s say that I choose to invest that £152 in UK shares each month. By reinvesting my dividend income I could, after 25 years, have made a healthy nest egg of around £139,000. That’s based on that figure of 8%.
And thanks to the power of compounding, the longer I invest (and reinvest), the bigger the sum I might expect to make to retire on.