Many of us are seeking to turn spare cash into passive income. But one of the difficulties is the most rewarding place (historically) to earn cash – the stock market – is also (probably) the most daunting. The fear of investing in companies is perhaps one reason why only 16% of UK residents have a Stocks and Shares ISA.
Let’s strip it down then. What’s the easiest way to get £100 a month rolling into a bank account? And how much is needed to do so?
Approaches
One approach that’s getting more and more popular is investing in index funds. These large funds contain hundreds, sometimes thousands of stocks. So much diversification means the highs and lows are smoothed out, but it does come with a huge drawback for those on the hunt for passive income – smallish dividends.
Take the S&P 500, for example. The leading American grouping is among the most recommended indexes for beginners but is pretty stingy on the dividend front. Its current 1.14% yield would make that passive income goal a tough stretch. An ISA would need £105,263 to receive £100 a month in the first year on that figure.
Why is the yield so low? One reason is that American companies often prefer to use their money for share buybacks. This creates wealth by boosting the share price rather than returning the cash directly to investors. I should also mention that the markets currently expect more growth from US stocks which pushes the yield down as a percentage.
This is no bad thing – and I’ll mention that I have a position in the S&P 500 myself – but it makes the short-term passive income goal a lot tougher than it needs to be. But there is another way.
Worth it?
One reason investors are attracted to British stocks like those on the FTSE 100 or FTSE 250 is they boast some of the best dividends the world over. The country has a much stronger focus on returning cash to shareholders. And this is why stocks like Phoenix Group (LSE: PHNX) can offer yields that put those found in America in the shade.
The current Phoenix dividend yield is 7.25%. To achieve that £100 a month goal at that yield, an investor would need £16,551 in an ISA. The dividend is forecast to rise over the next year, which could bring the amount down a little more too.
That’s the second-highest dividend yield on the FTSE 100. Can it really stay that high for long. Well, maybe. No dividends are guaranteed, but Phoenix has been one of the most attractive dividends for a decade now.
In fairness, that’s been achieved in a 10-year period of relatively smooth economic times. A serious crisis like that in 2008 would affect its business in life insurance and wealth management.
To sum up? Anyone new to investing looking to take their first step could do a lot worse than finding a high-quality dividend stock to bring in some early passive income. I think Phoenix could be worth considering for the task too.
