How I’d invest to make £1k of monthly bulletproof passive income

Jon Smith outlines the key factors, including the dividend cover ratio, that he looks for when filtering for strong stocks for passive income.

| More on:
Passive and Active: text from letters of the wooden alphabet on a green chalk board

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In finance, there’s no such thing as a guaranteed outcome. I can’t say for certain if a stock I buy will go up in value, or if a dividend stock will continue to pay out passive income. Yet I can try and build a portfolio that’s as bulletproof as possible, so that I can have confidence that it can weather storms. Here’s how.

Filtering for the good stuff

In my eyes, one of the best filters I can apply is the track record. Just like I mentioned, I can’t say for certain if a dividend stock will keep on paying out income. But if the stock in particular has a proven history for over a decade or more of payments, it does make me feel confident. For example, if cash was paid out even during the pandemic, it stands to reason that the company can withstand problems.

Another way I’d invest is to filter for stocks with a decent dividend cover ratio. This measures how many times the dividend can be covered by the earnings. Ideally, this ratio should be well above 1. A ratio around 2 shows to me that the income is sustainable. If it’s below 1, then this shows that a dividend cut could be coming.

Finally, to bulletproof my income stream I’d make sure I had a portfolio of at least a dozen stocks. Sure, this can be built up over the course of several years. But the key factor is that the more companies I own, the less I’m going to be impacted if one has problems in the future.

One that I’d include

A good example that ticks the boxes is Rathbones Group (LSE:RAT). The UK wealth manager sits in the FTSE 250, with a current dividend yield of 5.45%.

It has a good track record, with 13 consecutive years of the dividend being either increased or held. As a mature company (founded in 1742), dividends are a key way that the business keeps shareholders happy.

I think the income will be sustainable going forward thanks to the solid business model it operates. The higher the funds under management and administration (FUMA), the higher the fees and commissions can be to generate revenue. The good news is that in the half-year report, FUMA had grown to £60.5bn from £58.9bn from 2022. If this keeps ticking higher, then revenue and profitability should be taken care of.

I do note the 24% fall in the share price over the past year. I think part of this is to do with the short-term pains associated with integrating Investec Wealth to Rathbones. Further, the Q4 update flagged up that “economic uncertainties are expected to persist in 2024”. This could provide volatile markets that could cause investors to pull out funds.

The dividend cover ratio for Rathbones is currently 2. This also gives me confidence that this stock is sturdy going forward. If I was starting from scratch to build an income portfolio, I’d consider buying it.

If I invested £500 a month in a dividend portfolio with an average yield of 5.45% for the next two decades, I could be set with a pot worth £218k. The following year, this could pay me out just under £1k on average each month.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Rathbones Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Dividend Shares

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Investing just £10 a day in UK stocks could bag me a passive income stream of £267 a week!

This Fool explains how investing in UK stocks rather than buying a couple of takeaway coffees a day could help…

Read more »

Investing Articles

If I were retiring tomorrow, I’d snap up these 3 passive income stocks!

Our writer was recently asked which passive income stocks she’d be happy to buy if she were to retire tomorrow.…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Dividend Shares

These 2 dividend stocks are getting way too cheap

Jon Smith looks at different financial metrics to prove that some dividend stocks are undervalued at the moment and could…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

£9,000 in savings? Here’s how I’d aim to turn that into a £12,300 annual passive income

This Fool explains how he'd target thousands of pounds in passive income every year by investing in high-quality businesses.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Dividend Shares

Is Legal & General the best stock to buy in the FTSE right now?

UK investors have been piling into Legal & General in recent weeks. But are there better FTSE shares to buy…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d try to turn that into £7,864 every year in passive income

Investing a relatively small amount in high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Is Aviva’s share price a bargain now it’s trading well below £5?

Aviva’s share price has slumped to well below £5, but even before that it looked a bargain to me, with…

Read more »

Investing Articles

The M&G share price looks far too low to me!

The M&G share price has dived by nearly 16% since peaking on 21 March. But with a near-10% dividend yield,…

Read more »