Finding ways to earn passive income has never been more important. According to the Office for National Statistics (ONS), the median household saw its disposable income fall by 0.6% last year.
The good news is that rising interest rates have been creating opportunities for investors looking to give their monthly income a boost. In particular, I think now’s a good time to be looking at dividend stocks.
The data
Data from the ONS indicates that the median household had £32,300 in disposable income. That’s down 0.6% from the year before.
With inflation remaining well above the Bank of England’s 2% target, I think there’s likely to be additional pressure on budgets this year. And things might well get worse if the UK falls into a recession.
It’s not all bad news, though – there are ways for households to put their disposable cash to work to earn extra income. And rising interest rates are making these opportunities more and more attractive.
Using 10% of a median household’s income to generate passive income involves investing £3,230 per year, or £269 a month. In today’s stock market, this could yield some meaningful passive income over time.
Dividend stocks
One of the easiest ways of earning passive income is by investing in dividend stocks. Investors buy shares in companies that distribute their earnings and receive their share of the profits in cash.
Over the last couple of years, rising interest rates have been putting pressure on share prices. And in some cases, this has caused dividend yields to become unusually attractive.
Shares in Warehouse REIT, for example, have declined by 27% over the last 12 months. As a result, the company now has a dividend yield of just over 8%.
The income generated by investing £269 at these levels starts off small, but it can grow quickly. By adding each month and reinvesting the dividends, an investor could earn £3,504 per year after 10 years.
Diversification
Investing in the stock market always comes with risks. With dividends, the biggest danger is the possibility of a company being unable (or unwilling) to return cash to its shareholders in future.
There are some things investors can do to try and limit the risks, though. One of the best ways of doing this, in my view, is by aiming to diversify any investments.
Building a diversified portfolio involves investing in businesses from different sectors and geographies. This helps offset the danger of anything going wrong in any specific industry or region.
For example in addition to Warehouse REIT, I could buy shares in US food company Kraft Heinz. This would help limit the effect of a UK recession on my portfolio by giving me exposure to an unrelated sector.
Building a passive income portfolio
I’d look to achieve this diversification over time, though. The main benefit of monthly investing, in my view, is that it allows investors to take advantage of whatever the best opportunities at the moment are.
Investing £269 each month in dividend stocks might not seem like a lot. But in the current stock market, I think there are opportunities to start building a significant passive income portfolio.
