Passive income ideas: why dividend stocks remain my favourite way to bank cash

With low minimum investment size and flexibility on the yield chosen, Jonathan Smith explains why he likes dividend shares as a passive income idea.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Newspaper and direction sign with investment options

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.

There are several different types of passive income ideas. All of them have the same principle, to try and generate cash on a regular basis in a non-active way. The activeness refers to the level of effort that I have to put in as the investor. In a perfect world, I could invest in something and completely forget about it, while enjoying the benefits of the income. This extreme is almost impossible, but as far as truly passive income ideas go, dividend stocks are my favourite.

Low minimum investment size

Unlike other passive income ideas that require a large amount of upfront cash, dividend stocks don’t have this hurdle. This means that I could invest a nominal amount like £10 in a stock if I wanted to. This makes the concept of dividend income from stocks appealing to people regardless of their cash balance.

Clearly, the more I invest, the larger the amount of passive income I’ll receive. But what I like about the low minimum investment size is that I can build up my pot over time. For example, I could invest £100 a week and do this for years. This is a huge benefit in my opinion. It contrast to investments such as bonds or property that can have relatively high minimum deposit or investment amounts in one go.

The downside of a low minimum is that the passive income from dividend shares won’t make a difference in the beginning. If I invest £100 a month in shares yielding 4% a year, I’ll only be making £48 in the first year.

The passive income idea with flexibility

Another point I like is that I have control over the amount of passive income I make from this idea. This is because I can easily calculate the dividend yield that I’ll be getting from a particular stock. If the yield (and the income) isn’t what I’m looking for, then I can look into a different one instead.

At the moment, within the FTSE 100 the dividend yields range from 0% to 12.87%. So I have a lot of choice to target particular dividend shares depending on my goal. If I’m looking for low risk and sustainable income then I can target companies that fit this bill. Alternatively, if I want to achieve a yield of 6% or 8%, then I know I’m going to have to take on higher risk. 

Whatever my goal is doesn’t really matter too much, the benefit from this passive income idea is the flexibility that dividend stocks give me.

Points to consider

One of the main risks with using dividend shares for passive income is that the future payments aren’t guaranteed. If a company has a bad year (like 2020), then management can decide not to pay out any income to shareholders. This could dry up my income considerably depending on the stocks in my portfolio.

On balance, I do feel that as far as passive income ideas go, investing in dividend shares is one of the best.

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.

jonathansmith1 and The Motley Fool UK have no position in any shares mentioned. 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 Investing Articles

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

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »