When I’m focusing on the dividend part of my portfolio, I have two key points in mind. Primarily, I want to pick the best income stocks possible that can offer me a generous but sustainable payment now and in the future. Yet the other point I try to model is how much passive income I could generate overall, to hopefully hit my goals. From my calculations, I think I could end up making £1,000 a month from the below six stocks.
The best dividend shares for me
Let’s run through the specific stocks to begin with. Half a dozen companies give me a nice sweet spot between feeling the benefit from one doing well, but also not being completely punched in the face if one decides to cut a dividend. It’s diversified, but without me having to go through the hassle of picking a hundred stocks to invest in.
I’m keen to pick up stocks from sectors including alcohol and tobacco. I have a positive outlook on both areas. These goods have low price elasticity of demand. What this means is that if the price increases slightly, demand doesn’t really change. During a period of high inflation, this is good. This isn’t just theory either. I know myself that if a pint increases from £4.50 to £4.95, I’ll still order a pint! Yet that’s a 10% increase to factor in.
To this end, I’d buy Diageo (2.11%), Coca Cola HBC (3.22%), British American Tobacco (6.44%) and Imperial Brands (6.71%). Those are the current dividend yields in brackets.
I’d pick my final two stocks from major banks. I think this area is one of the hottest for 2023. Interest rates are going to continue to rise in the UK and US next year. This will help banks to increase revenue made from the net interest margin. This margin grows as the interest rate increases. It allows the firms to charge more on loans while only marginally increasing the amount paid on deposits.
The two stocks that I think I’ll buy are HSBC (5.04%) and Lloyds Banking Group (5.01%).
Passive income potential
The average dividend yield from the six stocks on my watchlist is 4.75%. I’m going to assume that this stays the same going forward and that I can reinvest my dividend income back at the same yield. This might not be the case in practice, and each of the stocks has its own specific risks. But it’s an assumption I have to make. I need to be aware that I might need to sell a stock if it stops paying a dividend.
I’m also going to assume that I can invest £500 a month. Using my yield and my funds, I can grow my portfolio over time to reach my goal. By my calculations, if I do this for the next 23 years, I’ll be able to enjoy £1,000 a month in passive income from then on.
OK, that sounds like a long time to wait! But this doesn’t have to be the only pot of funds I’m building up. I can also allocate some money to top growth stocks, that could yield me sizeable capital gains in the space of only a few years.
