There are many ways to earn a profit in the stock market (and an equal amount of ways to make a loss!). A favourite method among investors to earn passive income is by owning dividend shares.
With inflation and interest rates on the rise, the stock market is becoming increasingly volatile. For this reason, I am on the hunt for high-yielding, low-risk dividend stocks I can add to my portfolio.
By investing as little as £100 a month into these stocks, and reinvesting the dividends, I believe I could be making well over £10k a year by the time I retire. Here’s how I plan to do it.
The method
I am currently 21, so I would be looking to pay £100 a month for the next 30 years. A spare £100 may be hard to find, but for context, skipping a £3 morning coffee each day pretty much covers it!
The key here is to keep up my payments and reinvest my dividends. By reinvesting my dividends, I can benefit from compound interest. For instance, starting at £0, and by investing £100 a month for 30 years, I could end up with well over £400,000, assuming a 13% annual total return (dividends plus company growth).
Assuming the above growth rate, I would reach my £10k target by year 18.
The stocks
I want to be earning passive income, which means I need to pick high-yielding dividend stocks. The best companies to pick here are slow-growth, stalwart industry giants. These companies are the most likely to turn over regular dividends and keep producing cash flows. A small amount of industry research and checking historic dividend payments should help me here.
A method I would plan to use in order to minimise risk would be to diversify my portfolio. This means picking high-dividend stocks across separate industries. Therefore, if one sector underperforms, its losses may be made up for by growth in another sector.
With the macroeconomic outlook looking increasingly uncertain for the next few years, this could be an essential method to employ.
The risks
While this sounds great on paper, it is not a foolproof method. There is no way of predicting a stock’s future dividend payments or annual returns (if there was, we would all be rich!).
Events like the Covid-19 pandemic force companies to skip dividends and even stop paying them for long periods of time. For this reason, it might take me longer than 18 years to reach my goal of £10k in passive income.
However, by year 30, I am confident that I will be able to hit that goal, even if I have to make some minor changes to my dividend portfolio along the way.
