With inflation still elevated, July seems like the perfect time for investors to begin generating some passive income to help put their money to work against red-hot interest rates.
Despite what some may think, a huge amount of cash upfront isn’t needed to generate healthy returns. And over the long term, these funds build up.
With that in mind, here’s the strategy I’d use this month to build passive income streams that could serve me for the years ahead.
The plan
To start, I’d target the FTSE 100. The last decade has proved to be a torrid time for the UK stock market. In this period, the Footsie has risen a meagre 16%. For comparison, the S&P 500 has climbed by over 180%.
However, as a Fool, I believe this presents an opportunity. And I see plenty of value in UK stocks right now.
The index also has a host of companies that pay investors sizeable dividend yields. And on average, it trumps the payouts seen in overseas indexes. This year alone it’s predicted to reward investors with over £84bn in dividends.
The execution
So, what’s next?
Well, to execute my plan, I’d target a variety of industries within the FTSE 100. By doing so, I limit the risk of my investments being reliant on one company or industry.
There are currently over 10 companies that offer yields of 7% or more, with these spread across the investment, insurance, housebuilding, and tobacco industries. This includes the likes of insurance giant Legal & General, as well as British American Tobacco.
Elsewhere, there are stocks that offer slightly lower yields but still sit above the index’s average (around 4%).
For example, I currently like the look of banking stocks, so I’d look to add a few of those to my portfolio. Stalwart Lloyds offers a 5.6% dividend yield, while its 43p share price, in my opinion, looks cheap.
Boosting profits
There are other methods I could employ to boost income, such as reinvesting my dividends.
From this, I can benefit from compounding. For example, if I own a stock that generates 7% growth per year and pays me a 6% dividend, I’d be looking at a 13% annual return. This means an initial £500 investment compounded over 30 years would equate to £24,000. Not bad.
Furthermore, if I topped up my investment with a small monthly payment of £30, after 30 years my pot would be sat at over £150,000.
The risks
Despite this, it’s worth noting that there’s always a risk when targeting dividend stocks. Payments can be reduced or cut altogether should unforeseen circumstances arise. And the business can do this at any moment.
However, diversifying and investing in a host of sectors mitigates the risk of any cuts having a major impact on a portfolio.
With that, if I had some spare cash, I’d use July as the perfect opportunity to kickstart my journey to creating a stream of passive income. Starting now and then topping up with monthly payments would hopefully see me build a sizeable pot in the years ahead.
