With another hike earlier this month, the UK interest rate sits at 4%. This is a very attractive option for me to earn some income from cash on my account. However, the actual rates I can get as a retail account holder are nowhere near 4%. In order to boost my yield, I like to use dividend stocks to generate cash. It’s higher-risk, but can lead to me making significant money further down the line.
Basic principles for dividend investing
The general premise of investing for income revolves around dividend payments. When I buy a stock, I become a shareholder. I’m eligible to receive money from the company. This mostly comes in the form of a dividend, which is usually paid out of the profits from a particular period. Dividend payments can come once a year, or as frequently as each quarter.
The exact amount of money I’ll get paid depends on a couple of things. Importantly, the amount I invest impacts the dividend I get. If I own 10 shares, I’ll clearly be eligible for less dividend income than someone who owns 1,000 shares.
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Further, the dividend per share payment is also a factor. A company might have a good year and pay out 10p per share, another firm might only pay out 1p per share. The size of the dividend therefore make a large difference.
Fortunately, an easy calculation exists to make my life more simple. It’s called the dividend yield. This works out as a percentage the dividend per share relative to the current share price. Usually, the higher the yield, the more I’d want to own the stock.
How I could make serious cash
To make a lot of money, I could simply pick the highest-yielding options from the FTSE 100 and FTSE 250. Both indices have constituents that have a yield above 16% at the moment.
Yet a risk with dividend investing is that in the future, a company stops paying out income. This could be due to the business falling on tough times. If I see a yield above 10%, I’m a bit cautious that this might be the case. If the share price has fallen, it can artificially push up the yield to unsustainably high levels.
This doesn’t mean that I can’t make serious cash. I just need to own a diversified portfolio of stocks, so that if one blows up, I can deal with it.
To this end, I’m going to target a high yield, but not ridiculously so. An average yield of 7% is my goal. If I invest £600 each month and reinvest any dividends I get paid, my portfolio can compound quickly. After 12 years, I could start to take the dividend payments and enjoy them. By this stage, my portfolio would be worth over £127k, generating me just under £750 a month in year 13 onwards.
