Right now, passive income is a hot topic. In the current environment, everyone is looking for a little extra cash.
Now, there are many ways to generate passive income. However, one of the easiest is to invest in dividend stocks. These give investors regular cash payments out of company profits.
Here’s a look at how a £10,000 investment in one UK stock could potentially generate around £800 per year.
This dividend stock is a cash cow
The dividend stock I want to put the spotlight on today is Legal & General (LSE: LGEN). It has been a reliable income generator over the last decade and currently offers a very attractive yield.
Legal & General’s share price is currently 256p. This means that if I was to buy £10,000 worth of stock, I’d get 3,906 shares (ignoring trading commissions).
Now, for the 2023 year, City analysts expect it to reward investors with total dividends of 20.4p per share.
So, if I owned 3,906 shares, I could be in line to pick up income of £797 for 2023 (3,906 x £0.204 = £797).
A payout of nearly £800 from a £10k investment is an excellent result, to my mind.
There are few things to be aware of here, however.
Firstly, the dividend of 20.4p per share is just a forecast. And analysts’ forecasts can be off the mark at times.
Secondly, dividends are never guaranteed. While Legal & General has increased its dividend payout every year for over a decade now, there’s no guarantee it will continue to do so. There’s always the chance that it could cut its payout.
Third, the share price moves around quite a bit. So, while an investor may be able to generate solid returns from the dividends, they could still lose money on their investment if the company’s share price was to decline significantly.
Generating income from dividend shares
Now, I don’t plan to buy Legal & General shares myself in the near future. That’s because generating income is not my focus right now. I’m more focused on generating growth from my investments.
However, if passive income was my main goal (say, if I was retired and looking to create income streams), I would certainly consider buying this stock for its dividend.
It wouldn’t be the only dividend stock I’d buy, however.
When investing in dividend shares, it’s important to build a well-diversified portfolio. Putting together a broad portfolio of stocks improves one’s chances of generating a dependable income stream.
More importantly, it significantly reduces the chances of generating capital losses. If the share price of one company falls, it will hopefully be offset by share price increases from other companies.
So, if I was planning to buy Legal & General shares today, I would look at plenty of other dividend stocks as well. And I’d seek out stocks in sectors such as healthcare and consumer staples for diversification.
Constructing a broad portfolio of dividend stocks would give me the best chance of generating reliable passive income.
