Passive income from dividend stocks can be a great way to boost your income without needing to take on extra work. Although some initial capital is required, this investment can deliver impressive cash returns over time.
In this article, I want to share three methods I might use to generate an extra £100 per month from the stock market, if I had fresh capital to invest.
#1: a simple passive income
One option I’d certainly consider is a low-cost FTSE 100 index tracker. By holding a low-cost ETF inside a Stocks and Shares ISA, I’m confident I could keep my total costs at less than 0.5% per year.
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In addition, investing in a FTSE 100 fund means I’d get exposure to popular UK dividend stocks, such as Shell, GSK, Lloyds, British American Tobacco and BAE Systems.
The FTSE 100 currently offers a forecast yield of 3.9%. To generate an annual passive income of £1,200 (£100 per month), I’d need to invest about £31,000.
However, one downside of a FTSE 100 tracker is that the yield isn’t especially high. With interest rates now nudging 3%, I’d like a higher yield. I reckon my next pick solves this problem.
#2: 40 years of dividend growth
To generate income from large UK dividend stocks, I’d probably choose to invest in an investment trust which specialises in this type of investing.
My choice would be The Merchants Trust (LSE: MRCH). Merchants was founded in 1889. Although its investments have changed, the trust’s goal of providing reliable income plus capital gains to its investors has not.
I think Merchants’ results speak for themselves. The trust has increased its dividend every year since 1982. That’s 40 years of unbroken income growth. Shares in the trust have also outperformed the FTSE 100 over the last 10 years.
The risk, of course, is that past performance is no guide to the future. However, given the trust’s 100-year-plus history, I’d be comfortable trusting my money to Merchants’ managers.
To generate a £1,200 income from the Merchants Trust, I estimate I’d need around £23,500.
#3: high yield from property stocks
My final choice has the potential to generate a higher yield than either of the other two options I’ve discussed.
The UK market has a wide choice of property stocks. I prefer to invest in property through Real Estate Investment Trusts (REITs), due to their focus on dividend income.
Rising interest rates and the market sell-off mean that some attractive dividend yields are now available in this market, in my view.
I’ve selected five REITs specialising in different types of property. I’d be happy to buy these together to form a mini-portfolio of property stocks. Although I’d probably want some other diversification too, I’d be comfortable using these for passive income.
| REIT | Forecast dividend yield | Type of property |
| Target Healthcare REIT | 7.6% | Care homes |
| Land Securities | 6.5% | London offices and large retail sites |
| Supermarket REIT | 5.9% | Supermarkets |
| Tritax Big Box REIT | 4.9% | E-commerce warehouses |
| Custodian REIT | 6.3% | Regional UK commercial property |
| Average yield | 6.2% |
If I invested equal amounts in each of these five REITs, they would have an average forecast dividend yield of 6.2%. To generate £1,200 of passive income each year, I estimate I’d need to invest £19,500.
