In the latest Bank of England forecasts, the indication is that we’ll be in a recession for all of 2023. I don’t think this comes as a massive surprise to many of us, given inflation levels and spiraling energy costs. Yet this doesn’t mean that I can’t make use of top dividend stocks to provide me with passive income over this period. Here’s my game plan.
Falling stocks boost dividend yields
As a recession is expected, I don’t think we’ll get a stock market crash when this becomes a reality. Sure, we could see the market trend lower instead of higher, but not in the same short, sharp burst like the crash of 2020.
A trend lower actually helps me out when it comes to trying to increase my passive income. This is because it raises the dividend yield. The yield calculation divides the dividend per share by the current share price. So if a stock trades at 100p and the dividend is 5p, the yield is 5%. If the dividend per share remains the same but the share price falls to 80p, the yield jumps to 6.25%.
By starting now and investing regularly throughout the next year, I should be able to take advantage of higher dividend yields.
For example, the Taylor Wimpey share price has dropped 40% over the past year. This has helped to push up the dividend yield from 4.0% to 8.37%. I understand that investors are worried about a property downturn in this cyclical sector. But for a long-term buy and with the ability to pick up generous income in the meantime, this looks attractive to me.
How I can reach the passive income goal
In practical terms, to reach £1,000 in dividends I’m going to need to invest in regular chunks. Given my thoughts on yields rising, I’m going to assume I can target an average yield of 6% without taking on high risk.
I’m going to have to be aggressive regarding the amount I spend in order to reach my target quickly. I’ll to start off by putting £6,500 from my savings in dividend stocks. My aim is to then invest £750 a month until the end of next year. In the process of reinvesting my dividends during this period, I’ll have accumulated £1,000 in income.
From there, I can take the income and use it as needed. Or ideally, I can leave the money there and let it compound into larger gains in coming years. I don’t have to keep up the pace of investment, even just letting the existing pot grow would be enough.
Points to remember
It’s true that investing £750 a month might not be possible each month, especially during a recession. I might have to reduce this amount, so it will take me longer to reach my goal.
Another risk is that a recession could cause some FTSE 100 stocks to cut their dividend payments due to lower revenues.
I’m confident I can deal with both points if they arise, but am aware of the issues they could cause.
