Passive income is the holy grail of investing for many. I also invest in dividend stocks with the aim of earning passive income. These earnings can either be reinvested, or I can use it to fund my life.
Today, I’m looking at how I could achieve £750 in dividends by investing £10,000 in stocks and shares.
My requirements
I’m looking at stocks with sustainable dividend yields. This normally means companies with strong dividend coverage ratios (DCRs).
The DCR measures the number of times a company can pay its stated dividends to shareholders. A DCR above two is considered a healthy ratio. A DCR closer to one may be a cause for concern.
Dividends can also be sustainable if the DCR appears lower but cash generation is strong. Net income, which is used to calculate the DCR, can be distorted by earnings management.
As such, some investors will use cash flow from operations as a more conservative method of assessing the dividend health.
My picks
Greencoat UK Wind, as the name suggests, invests in wind farms in the UK. It’s not a small player either. Greencoat has 45 wind farm investments across England, Scotland, Wales, and Northern Ireland, with an aggregate net capacity of 1,289.8 megawatts — that’s enough to power 1.5m homes.
The trust offers an attractive 5% dividend yield and is currently trading at a small but noteworthy 1.7% discount versus its net asset value. I recently bought this stock as I’m expecting further emphasis on wind production this year, including an end to the moratorium on onshore wind farms.
One big dividend-payer that many people haven’t heard of is Phoenix Group Holdings. This savings and retirement business offers a solid 8% yield and has a DCR of 1.7. Impressively, it has 13 years of consecutive payments and investors benefit from consistent dividend growth.
Cash generation is also strong right now. The insurer said in the autumn that it expects to deliver around £1.2bn of incremental, organic new business cash generation in 2022.
My final pick is Sociedad Química y Minera de Chile, which has a dividend yield of 8.6%. I don’t often invest in USD-denominated stocks because the appreciation of the pound would wipe out gains in the share price.
But I’ve made an exception for this lithium miner. It is a low-cost producer and has a 25% share of the global lithium market with 20+ years of reserves. With China’s reopening in the near term, and long-term trends towards electrification, I recently added this stock to my portfolio.
Another positive is that lithium demand has remained more robust than originally anticipated. Some estimates saw prices falling to around $10,000 in 2023, but that hasn’t happened.
Passive income generation
So, collectively these three stocks would provide me with a 7.5% dividend yield if I spit £10,000 equally between the three of them. I’d also argue, that with the exception of Phoenix Group, these stocks offer long-term growth potential. I could therefore hope for £750 in dividends and some growth.
