It was recently suggested by Bank of England Governor Andrew Bailey that inflation in the UK is set to continue to fall in the months ahead. However, with it still sitting at 6.8%, now seems like a smart time for investors to put their money to work buying shares in order to generate some passive income.
It’s often said large amounts of capital are needed to generate healthy returns from the stock market. But this couldn’t be further from the truth. As it has proved time and time again, over the long term, investing small amounts can see funds build to a sizeable figure.
With that in mind, here’s how I’d start to generate streams of passive income that could serve me for the months and years ahead.
Where to start
To get going, first of all, I need to pinpoint where I want to invest. And I think the FTSE 100 is the best place. It’s been a tough decade for the UK’s leading index, with it rising just 14% during that time. By comparison, its American counterpart, the S&P 500, has soared an impressive 170%.
Despite its subpar performance, I’m not fussed. As a Fool, I see this as an opportunity. And with the FTSE 250 included, I see value in UK stocks.
With 2022 being the worst-performing year for the stock market since 2008, over a decade ago, and with the market yet to recover fully, now is a rare chance to buy. What’s more, both indexes have a host of companies offering investors meaty dividend yields.
The next steps
So, I’ve targeted UK stocks, but where do I go from here?
Well, to put my plan into action, I’d target a variety of industries within the UK’s major indexes. In doing so, my investments aren’t reliant on one company or industry.
There are multiple sectors that offer high yields, including finance, insurance, housebuilding, and tobacco, so I’d focus on these. Of these, I already own shares of Legal & General, Lloyds, and Barclays to name a few. Elsewhere, I like the look of British American Tobacco and Vodafone.
There are also those that offer a lower payout than inflation but are still above the average yield of both indexes. Of these, stocks such as Games Workshop are firmly on my radar.
Enhancing my returns
On top of this, there are a few other methods I could employ to boost my returns.
’Id make sure I invest every month and reinvest any returns. Taking advantage of compounding — where I get dividends from those reinvested amounts — should allow me to reap the rewards of the stock market. And by investing with a mindset of decades, not months and years, this will allow me to build a significantly larger pot.
Over time, I could buy more shares in high-yielding companies, in turn increasing my chances of wealth-building.
The risks
It’s worth noting here that risks do exist when targeting dividend stocks. Payments can be reduced or slashed by a firm, with no warning. Therefore, I’d do through research before buying any stock and would review my picks regularly.
However, by using the methods above and targeting high quality stocks, I’m confident I could build solid streams of passive income.
