Buying dividend stocks is one of my favourite ways to make a passive income. My research has shown that other ways to try and make easy money seem complicated and often offer subpar returns.
By purchasing shares I can look forward to a steady stream of income if I’ve built a diversified and well-researched portfolio of shares. Here are the steps I’d take to target a £720 passive income with UK and US shares.
1. Shop for an account
The first thing I’d do is put £10,000 in an account that allows me to buy and sell shares. My preference would be to open a Stocks and Shares ISA, and/or a Self-Invested Personal Pension (SIPP).
These products exclude me from having to pay a penny in capital gains or income to the taxman. Over a period of years, this can end up saving me many thousands of pounds.
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Not all ISAs and SIPPs charge the same however. And the difference between trading fees and account charges can vary greatly. So I’d spend time finding the one that’s most cost-effective for my needs.
2. Diversify my holdings
The next thing I’d do is conduct research on lots of different stocks to buy. Holding a variety of companies — ideally 10-20 — allows me to effectively manage risk. It also gives me exposure to a range of investment opportunities.
I’d aim for dividend stocks over growth shares. This seems obvious, given that I’m looking to make a passive income. But other than this, I’d be quite flexible with how I invest my cash.
I’d look to get exposure to different industries that serve a variety of end markets. I’d also seek a selection of companies that do business in an array of regions. This way I could generate a smooth return over time.
I could add other asset classes to my portfolio too, like bonds, cash and commodities. Having said that, the superior historical returns from share investing mean I’d target most of my money towards equities.
3. Target dividend heroes
My final step would be to select companies that offer high dividend yields. I’d also only consider shares I’m confident will provide a growing and sustainable dividend over the long term.
Take Aviva (LSE:AV.) — a share I hold in my stocks portfolio — as an example. Today, its dividend yield stands at a showstopping 7.1%.
As a financial services provider, the FTSE 100 business can struggle to grow profits during economic downturns. This can, in turn, have a significant impact on dividends.
But Aviva’s robust financial health could, unlike some of its rivals, allow it to keep paying large dividends even during tough times. Its Solvency II capital ratio remains above 200% even after share buybacks, acquisitions and dividend payments.
If broker forecasts are accurate, a £10k investment in Aviva shares would give me £710 in passive income this year. And I’m confident this annual amount will rise over time as the company’s wealth, retirement and insurance markets steadily expand.
