Even though the start of January is always busy, it’s still a period when I have time to think about the year ahead. Given the cost-of-living crisis that hit us all in 2023, making more passive income this year is a goal I think most of us have. Excluding any investments I already have, here’s how I’d put a fresh £500 to work.
Drilling down
To maximise my potential for income, I need to focus on two things. My dividend yield needs to be high, allowing me to make the most out of my capital. I also need to invest in sectors forecast to do well in 2024 onwards. In this case, the dividend per share payments could grow as earnings throughout the year improve.
As for the yield, I don’t feel it makes sense to invest in anything below 4%. I can achieve this rate of return from a high-yield savings account at the moment. So I’m looking at the bucket with options between 7-9%.
When I look over the FTSE 100 and FTSE 250, there are currently 26 stocks that fit this range. This gives me plenty of choice to sift through.
Where to invest
Picking the right sectors is going to be key for my future income. One area I feel has a lot of potential this year is property.
The property sector already has some stocks with generous dividend yields. This is partly because the share price for some stocks in this area have been falling. Yet for 2024 onwards, I think the dividend per share could increase.
This is based on my view that interest rates have peaked and could be cut over the course of this year. With inflation falling, this would make sense. It would help to make mortgages cheaper and make people more comfortable about making large purchases (like a property). Homebuilders should therefore financially benefit from this move.
I could be wrong here, with interest rates staying elevated. This is the risk to my view. That’s why I’d also split my money into several other sectors to diversify.
The financial potential
I can make income from just allocating my £500 to a handful of stocks using two screening criteria. Yet with a target average yield of 8%, making £40 a year isn’t going to be a game changer.
But it does allow me to start a portfolio that I can grow for the long term. Depending on my financial situation later in the year, I could start to invest another £500 every quarter.
There’s the risk that dividend income could be cut. But in theory, if my yield stays the same and I do invest £500 every quarter, my pot could be worth £31.4k after a decade. This would then make me over £2,500 in income the following year!
