Like many investors, I’d like to build passive income streams and earn money with minimal effort.
Here’s my 5-step plan to achieve a £1,000 per month goal by investing in the stock market.
1. Save regularly
First, I need to save. To earn passive income from stocks, I’ll require spare capital to deploy.
Building a sizeable portfolio takes time. Establishing clear goals and sticking to them is essential if I want to hit my ultimate target.
2. Use a Stocks and Shares ISA
My next concern is tax optimisation, which I can achieve by buying shares in a Stocks and Shares ISA.
Capital gains and dividends are awarded tax-free treatment on investments kept inside the ISA wrapper. While this isn’t a huge concern in the early stages of my investing journey, it’s likely to become so once I start drawing from my portfolio.
The annual tax-free dividend allowance is £2,000. Given my passive income target is six times greater, I’d like to minimise my tax liabilities and maximise the amount that makes its way into my pocket.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
3. Pick high-yield dividend stocks
The third step is selecting dividend stocks to buy. In particular, I want to identify promising high-yield opportunities.
For example, Rio Tinto has an impressive, albeit cyclical, dividend history. It currently yields 10.41%. The mining giant’s been supported recently by tailwinds from rising prices in metals and commodities. Looking forwards, the FTSE 100 company should benefit from the ongoing electric vehicle revolution thanks to its new lithium concentration plant in Quebec.
On the other hand, the spectre of recessions across Asia is dampening demand for iron ore, which is one of the company’s key commodity markets. This may suppress growth in the Rio Tinto share price — a risk I’m prepared to take for a bumper yield.
4. Diversify
Diversification is important to ensure I secure a steady passive income flow. After all, dividends aren’t guaranteed. Individual companies can suspend or cut distributions at any time.
For me, a good balance to Rio Tinto might be specialist property outfit Derwent London. The FTSE 250 constituent sports a 3.07% dividend yield. Although this trails the index average, the company has a track record of growing its dividend for nearly 30 consecutive years. A knock to the share price following the mini-budget could present a buying opportunity.
Admittedly, increased flexible working arrangements may have a long-lasting negative impact on commercial property yields. Nonetheless, the firm’s concentration in upmarket London real estate and bespoke leasing arrangements should allow it to ride any volatility. I’d buy.
5. Maximise my passive income
Finally, it’s possible to harness the power of compound returns. By reinvesting dividends until I plan to spend the passive income, I should reach my goal faster.
Let’s crunch the numbers. Assuming my pool of dividend stocks has a collective 5% annual yield and experiences no capital growth, my ultimate target would be a £240,000 portfolio. I could achieve this in less than two decades by investing just under £20 per day and reinvesting the dividends.
In reality, the maths won’t be this simple. My portfolio will likely experience some years of poor returns. Nevertheless, investing little and often over the long term can reap substantial rewards!
