Earning passive income is a priority for many stock market investors, including me. By investing in dividend stocks, shareholders can benefit from regular cash payouts. Encouragingly, many high-yield shares currently offer the possibility of better returns than savings accounts today.
But, how would I build a passive income empire starting with zero in the bank? What considerations should I bear in mind when targeting dividend distributions from my portfolio? And what are some of the risks involved?
Let’s explore.
1. Save
First, I’ll need to start saving money to turn my passive income aspirations into reality.
Although it’s not an easy challenge in the cost-of-living crisis, my future self will likely be thankful if I put money away each month to buy shares.
A simple way to achieve this is to automate the savings process. Many brokers allow investors to contribute a fixed amount by direct debit each month.
Not only does this mean investors can start gradually building a sizeable portfolio, but maintaining financial discipline via regular investments also helps to mitigate volatility risk.
By ‘pound-cost averaging’, investors are buying stocks when share prices are high as well as low, smoothing the ride in what can often be an uneven growth journey.
2. Invest
With a savings plan in place, I’d turn my attention to which stocks I’d like to buy. As passive income is my central aim, I’d concentrate my holdings in dividend shares — after all, not all stocks offer dividends.
Thankfully, UK investors have plenty of choice due to the abundance of high-yield stocks in the FTSE 100 and FTSE 250 indexes.
For instance, some FTSE shares that currently feature in my portfolio include British American Tobacco (9% yield), Lloyds Bank (6% yield), and Centamin (3.7% yield).
In addition, investors should consider what investment wrapper they wish to use. If the goal is to earn passive income in later life, a Lifetime ISA or a SIPP might be particularly attractive due to government bonuses and tax relief.
However, if the objective is to earn readily-available dividend income, a Stocks and Shares ISA might be more appropriate considering this investment vehicle don’t carry withdrawal restrictions.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
3. Diversify
It’s important to note that dividends aren’t guaranteed and loss of capital is a real possibility when it comes to stock market investing.
Accordingly, to preserve wealth and aim for reliable passive income flows, I’d diversify my positions across a variety of companies and sectors.
Portfolio diversification doesn’t guarantee positive returns. However, it does help to limit downside risk by reducing my exposure to any single stock.
Moreover, some investors may find a 100% allocation in shares too much to stomach. Such a portfolio would likely experience considerable volatility.
Diversifying across a mixture of dividend stocks and fixed income assets, like bonds, might be an appealing option for investors prepared to sacrifice some growth potential for a higher chance of portfolio stability.
The bottom line
Ultimately, dividend investing has handsomely rewarded many investors with chunky passive income rewards throughout history.
Although it’s not risk-free, my first port of call when seeking a second income is the stock market. If I was at the outset of my investing journey, I’d follow these steps today.
