Earning a steady passive income is one of my investing goals. It allows me to build up another income stream from my earned income. And importantly, it could support me post-retirement, which is something that we could start planning for the day we start earning, in my view. In this article, I look at the best way for me to earn a passive income in 2022.
Why 2022 is a good year to start investing
I think 2022 is a particularly good time to start investing for a passive income, because dividend yields are set to improve. According to recent research by AJ Bell, dividend yields of FTSE 100 stocks could rise to 4.1% this year, up from 3.4% at present. And going by the fact that economic recovery is only expected to continue in the foreseeable future, I am optimistic about dividends for the medium term as well.
How much do I need to invest?
Consider for instance, the stock with the biggest dividend yield. I am talking about the FTSE 100 miner Evraz, which has an almost 16% yield. I need to invest just over £6,250 to earn £1,000 in passive income from the stock. That sounds like a pretty sweet deal to me. But here is the catch. I cannot just put my money in the stock and expect to earn my targeted amount every month.
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Mining dividends have gone through the roof in the past year because of an unexpected boom in industrial metal and other commodity prices in the past year. These are expected to cool off this year and I expect that dividends could decline along as well. This means that I have one of two options. I can actively manage my investments and switch to better options when I get the chance. Alternatively, I could invest in a bunch of stocks with the expectation of a lower yield, but one that is more predictable.
If I invest in the average FTSE 100 stock, as mentioned above, I could expect to receive around a 4% yield. But to make £1,000 in passive income from this, I would have to invest £25,000. This is four times the amount I have to invest if I were to buy the stock with the biggest dividend yield today! Even with all its risks, the first option sounds much better than this. But I do have a third alternative if I look hard enough.
My best alternative
I could carefully select from a combination of stocks that could give me decent yields and for some time to come. From utilities to miners and everything in between, I think I could manage a yield of around 7% at least. This would entail an investment of around £14,500, which is somewhere between the two extremes. It goes without saying that even with this investment it would pay to keep regular track of where my money is going. But perhaps I would not need to be as watchful as when I am investing in only one high-yielding stock.
