Investing guru Warren Buffett once said: “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” And that’s my minimum holding period when I buy shares for passive income.
For those with a few decades ahead of them, the opportunities for building up a sizeable pot can be quite eye-opening.
There are lots of big dividend yields to pick from. But not all big yields are equally good. No, I look for stocks that have a track record of paying the cash over long periods.
Financial stocks
That’s why financial stocks are my long-term favourites.
They can have their bad spells. I don’t need to tell that to anyone who lived through the 2008 financial crisis, I’m sure.
And some, like insurance stocks, can be cyclical. I’m looking at one of those today, Phoenix Group Holdings (LSE: PHNX).
The share price has had a bad time, down 25% in the past five years.
Buy when they’re down?
Should we buy insurance shares when the whole sector is under pressure? The business doesn’t do well when people’s pockets are squeezed, and inflation and interest rates are causing so much pain.
But I want to quote another of my all-time favourite investors, Sir John Templeton. He made his fortune going against the crowds.
He said: “It takes patience, discipline and courage to follow the contrarian route to investment success. To buy when others are despondently selling, to sell when others are avidly buying.”
He’s widely considered one of the best stock pickers of all time.
Phoenix valuation
The Phoenix share price fall has pushed the forecast dividend yield above 11%. The firm looks set to record a loss this year, so maybe that won’t happen.
But broker forecasts show a quick return to profit. And they do see the dividends staying up there.
They might be wrong, the dividend might falter, and the share price might fall. But just think of the passive income I could build if I can snag yields like these, and keep them coming.
What if?
What might I look forward to, based on long-term returns from an 11% dividend?
To reach my £1,000 per month, I’d need about £110,000 in Phoenix Group shares. That would pay £12,100 per year.
Let’s assume I don’t have that much to spare right now — I’ve checked all my pockets, and I don’t. But, if I could put a single Stocks and Shares ISA allowance into Phoenix, I could buy 4,300 shares.
All I’d need to do then is reinvest my dividends every year, and I could reach my goal in just 17 years.
Down to earth
Would I put this much into Phoenix shares? I would, but only as part of a diversified portfolio. Diversification is an essential part of my strategy.
Now, I’m sure things just won’t stay the same. I also expect financial stocks to face more ups and downs, and more pain, in the future.
But this ‘what if?’ does inspire me to work harder towards my passive income goals.
