More and more people I know are thinking about how to generate passive income. They talk about rental properties, all sorts of other things that sound weird and risky to me… and even income from the UK stocks market.
I like the idea of seeking income from UK stocks.
When investing in a stock, value is key. But what actually is value?
Buying value stocks
For ace investor Warren Buffett, it’s all about buying at a price today that’s low compared to a stock’s expected long-term worth.
That worth can come from share price gains, dividends, or a combination. It’s all about total returns, and the real key lies in the long-term aspect.
I also reckon that stocks with short-term risk can often offer the best long-term value. Investors worried about the short term often won’t buy them, and that can help keep the price down a bit.
Cheap FTSE 100 pick?
That’s why I’ve always liked insurance stocks. And it’s why Phoenix Group Holdings (LSE: PHNX) is my stock pick today.
I could equally have chosen Legal & General Group, or Aviva, as I rate them both highly. In fact, I hold Aviva shares, and I’ve owned Legal & General in the past too.
But I’m going for Phoenix for the dividend yield, forecast at 9.8%.
Before I look at the risk of an investment like this, let’s see what it might take to earn £1,000 a month from it.
The miracle of compounding
If I could put, say, £10,000 into Phoenix Group and I get that 9.8% dividend yield, after a year I’d have an extra £980 to add to my pot. So my total should reach £10,980.
Now, if I buy some more shares with that dividend money, I’d get an extra bit of cash in year two on top — the dividend from my new shares.
So, after two years at the same 9.8%, assuming the share price doesn’t change, I could be up to £12,056. The second year would have added £1,076.
And, by the magic of compounding, each year should build up more and more.
Regular investing
The main thing that can make a big difference, though, is regular investing.
And if I could invest £650, I could hit my target of £1,000 a month in passive income in 10 years.
In reality, I’d never put all my passive income eggs on one, erm, stock. No, I’d spread my cash across different firms in different sectors, because I see that as essential for safety.
Diversified returns
That’s even more important with a cyclical sector like insurance. Phoenix has just affirmed its progressive dividend policy, which is good. But it’s a business that can be hit by unexpected downturns.
Still, the same thinking would apply to any stock, and to a diversified portfolio as I build it up. I look for good value stocks, ideally ones paying good sustainable dividends, and keep reinvesting the cash.
