Early on in my stock investing journey, I focused largely on growth stocks. Dividends were incidental to me. I had pretty much my entire working life ahead of me, and I could dabble more in risky stocks and if they went bust, I had plenty of time to make up for the losses. Over the years, however, I have started focusing more on generating a passive income because I want a surer way of making money through my investments in 2022 and beyond.
Benefits of a passive income
There are many advantages to buying stocks to generate a dividend income. One, dividends allow me to supplement my regular income. This extra cash can be used to invest in stocks or for my spending. Since a number of high-quality stocks offer relatively predictable dividends, it also gives me visibility on the earning potential. Another advantage is that income stocks offer a good alternative to leaving cash lying around in my current account, which earns zero interest. Also, if I make the right stock choices, my capital could grow over time, adding to my efforts at wealth creation.
Step 1: spot the right FTSE 100 stocks
The first logical step for me, then, is to spot stocks that can both grow my capital and earn me a dividend income. In my opinion, considering FTSE 100 stocks is a good idea. These companies tend to be pretty stable, and many of them also have a long history of paying dividends. From oil biggies to utilities, there is a lot of choice among these to select the right stocks for me to buy.
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Step 2: figure out the time horizon
Next, I would carefully consider my investing time frame. For instance, it I were nearing retirement, I might like to buy and hold stocks for a long time so that I can continue to generate a monthly income. Otherwise, I might want to generate a high passive income for the next few years that could later be used to make any big purchases I had in mind. Or maybe I would like to do both.
Whatever my goal, there are FTSE 100 options to consider. For instance, I think cyclical stocks could offer good dividend yields over the next three to five years. Economic activity is likely to pick up as the pandemic recedes further. Sectors like banks and other financial services as well as oil stocks look particularly good to me from the income perspective right now.
For a longer time frame, I like dependable stocks like those in the utilities and healthcare sectors. Typically these stocks are defensives, whose demand is relatively stable irrespective of where we are in the economic cycle. Over a 10-year period, the chances of a downturn or two are quite likely. And these stocks are most likely to ensure me an uninterrupted generation of passive income during such times.
Step 3: active monitoring
Last, I would monitor my investments actively irrespective of how predictable my investments’ performance has been in the past. There could be unexpected changes, like we saw during the pandemic, that put even the otherwise best performing stocks in a difficult place. Or it could create unexpected opportunities. I could make changes to my investments accordingly to earn the best returns.
