There are many ways that we can choose to target a passive income. But far and away my favourite way to try and make extra cash is by building a portfolio of UK dividend stocks.
Share investing is proven to be a great way of making long-term wealth through a mix of capital gains and dividend income. The FTSE 100 for instance delivered an average annual return of 7.48% from its inception in 1984 to last year.
Of course, past performance is no guarantee of future success. But I think 2024 will be a great year to load up on UK shares. Not only do British stocks carry valuations well below their long-term averages but the dividend yield on many top FTSE 100 and FTSE 250 shares are too good to ignore.
Six passive income heroes
Right now, these share indexes carry forward yields of 3.8% and 3.4% respectively. But I think I can do a lot better than that with a little careful research.
Here are three Footsie companies that offer yields above the index average…
| Stock | Sector | Dividend yield |
| Aviva | Life insurance | 7.6% |
| Glencore | Mining | 7% |
| Legal & General Group | Life insurance | 9% |
… and here are three from the FTSE 250 that offer an even-larger average yield.
| Stock | Sector | Dividend yield |
| ITV | Media | 8.3% |
| Supermarket Income REIT | Real Estate Investment Trusts | 7.4% |
| NextEnergy Solar Fund | Closed End Investments | 9.6% |
Dividends are never guaranteed, and the payouts that companies deliver can be affected by economic, industry or company-specific factors. But by investing in a broad range of stocks like those above I can reduce the risk of dividend disappointment.
£1,630 in year one!
If these dividend forecasts prove to be accurate I could give my passive income a serious boost.
Let’s say I have £20,000 sitting in a low-yielding savings account. If I invested that equally across those six shares I would make an annual passive income of £1,630.
That’s far more than I could expect to make by investing it in a bog-standard savings account. The average yield for those FTSE 100 and FTSE 250 shares stands at 8.5%. By comparison, the best-paying easy access savings account (from Metro Bank) yields just 5.22%.
Compound miracles
Bear in mind too that that £1,630 in dividend income I’d make in year one could grow over time. I’m confident that these six blue-chip companies will all increase their dividends over the years, giving me an even-greater flow of cash from that £20,000 I invested.
I could even supercharge the passive income I make by reinvesting those shareholder payouts.
Using any money I receive to buy more dividend-paying UK shares, I would earn cash not just on my original investment but also on those reinvested dividends. This compounding effect is a powerful phenomenon in creating gigantic long-term returns.
As I say, many UK stocks are trading well below value right now. And with lots of quality companies offering large dividend yields, 2024 could be a great year to start building wealth.
