Investing £1,000 per month for 30 years in stocks with a 5% annual dividend yield results in a portfolio that pays £38,000 in annual passive income. But which dividend stocks should I buy?
I think there are a couple of FTSE 100 stocks that fit the bill. Here’s what I’d be buying if I were looking to take this approach.
Utilities
In my view, utilities stocks are difficult to beat when it comes to steady passive income. Demand generally stays steady in a recession and they often pay attractive dividends to shareholders.
If I were looking for passive income for the next 30 years, I’d be buying shares in SSE. This might seem like a strange choice, since the company lowered its dividend in 2020.
The reason for this, though, was to facilitate a significant shift in the company’s strategy. Instead of an unspectacular dividend payer, the business is investing for growth.
This has involved the company selling off its consumer business at the start of 2021. Since then, SSE has been investing in renewable energy generation assets – mostly in wind, solar, and hydro.
Shifting strategy away from a steady business to a growth model is a risk, but I think it makes the company’s long-term prospects much brighter. I view the stock as attractive at today’s prices.
Financials
I also think that UK bank stocks have the potential to be really good investments. In particular, I’ve got an eye on Lloyds Banking Group (LSE:LLOY).
In order to make money, though, banks need access to cash and the most obvious source of capital is retail deposits. This is where Lloyds has an advantage over its competitors.
The company has the largest share of UK retail deposits. This gives it the ability to operate at a scale that its competitors can’t.
Warren Buffett warned recently, though, that switching banks has never been easier. And this is a risk for Lloyds and its big competitive advantage.
I think, though, that customers pulling their savings from Lloyds in panic is unlikely. If anything, I suspect that concerned savers are more likely to head to the bank, rather than away from it.
Hold on tight
SSE shares come with a dividend of 4.8% and Lloyds shares currently pay a 5.2% dividend. So dividing £1,000 between them would yield an average return of 5%.
I’m not saying I’d buy these stocks forever – I’d want to monitor how the businesses perform and make sure the price stays at a level that offers an adequate return. But this is where I’d start off.
After that, building passive income is about staying the course. To reach £38,000 per year, I’d need to keep saving cash, investing in stocks at a 5% average return, and being patient.
Investing £1,000 per month at a 5% return yields £7,120 per year in passive income after 10 years. But that jumps to £19,144 after 20 years, and £38,371 after 30 years.
Share prices are likely to go up and down over that time. For a passive income, investor, though, the key is to keep focused on the end goal – that dividend income.
