Earning passive income is a key objective for many stock market investors, myself included. Fortunately, there are plenty of UK dividend shares that can help those trying to turn this dream into reality.
One of dividend investing’s key benefits is that it doesn’t involve the same start-up costs as other methods of generating passive income, such as buy-to-let properties.
With that in mind, here’s how I’d aim for £308 in monthly dividends starting with £5,000 in savings.
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Finding the right dividend stocks
When buying shares for income, I prefer to invest in well-established businesses with strong track records of providing dividend payments to shareholders.
Although more speculative high-yield stocks are tempting, I value the stability that Dividend Aristocrats offer, even if the yields aren’t quite as alluring.
The FTSE 100 and FTSE 250 have a healthy number of such shares in their ranks, so British passive income investors are spoilt for choice.
A stock to consider
To illustrate what kind of stocks I’m talking about, I’d like to highlight one FTSE 100 company that’s increased its payouts regularly over the years — RELX (LSE:REL).
This firm operates in the information and analytics sector, serving a variety of industries including science and medical research, legal, and risk management.
A 1.7% dividend yield might not sound too exciting, but I like its stable cash flows and forward dividend cover of two times earnings indicates a robust margin of safety.
In addition, business has been booming. Over five years, the share price has almost doubled, outpacing the FTSE 100 index by a considerable margin.
There’s also great potential for the company to leverage generative AI across its product suite. For example, the company recently developed Lexis+ AI, an artificial intelligence-powered legal research tool.
Via machine learning algorithms, this product can streamline the time taken to analyse documents and deliver tailored recommendations for lawyers. It’s easy to see how further technological advancements could boost the customer offering.
The company’s price-to-earnings (P/E) ratio of 37 is much higher than most FTSE 100 shares, which could be a risk to further growth. Nonetheless, I think it’s a stock worth considering, especially if the share price dips — I plan to add it to my own portfolio next month.
Portfolio diversification
While a Dividend Aristocrat like RELX might create a stable flow of passive income on the face of it, investors should remember that dividend payments aren’t guaranteed.
To mitigate the risk of any one stock I own cutting payouts or cancelling them altogether, I spread my investments across a variety of companies and sectors.
Accordingly, diversification is a great way to ensure all my passive income eggs aren’t in one basket.
Let compounding do the work
So, let’s get back to my initial £5k savings pot.
With a long time horizon and enough good fortune, if I invested my starting sum in a portfolio of dividend stocks like RELX, it might stand a good chance of growing into £73,927 after 35 years.
That would require a compound annual growth rate of 8%, which is in line with the FTSE 100’s historical average.
If I secured a 5% yield across my portfolio, I’d earn my target sum of £308 in monthly dividend distributions. Nice.
It’s time to put my passive income plan into action!
