Why buying dividend stocks could be a no-brainer for passive income
We all have our own ideas on how to invest to generate some long-term income. Here, I explain why I go for dividend stocks every time.
Published 20 July, 2023
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There are countless ways to try to earn some extra income. Everyone will have their own approach, but buying dividend stocks looks like the no-brainer way for me. Here’s why.
What do I look for when I want to top up my income? I want three key things.
What I want
I don’t want to have to do too much work. If I can put in an hour or so when I feel like it, and not leave the comfort of home, that would be great.
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then I need to be able to invest as much or as little as I like, when I like. I just don’t have big lump sums to plonk down. And I can’t commit to any fixed monthly outgoings.
And I want a method that has a long track record of success. I don’t need to take the income now. No, my aim is to build a good pot over the long term. And then I’ll start to draw down the cash when I retire.
Long-term success
Over the past 10 years, Stocks and Shares ISA’s have earned an average of 9.6% a year. That even beats inflation right now, and not many savings schemes can do that.
But in the 2019-20 year, we would have lost 13.6% on average. So cash in shares for a year can mean pain. But for 10 years, it looks a lot better.
Years like 2020 do come along. But already, UK shares are back to where they were before the pandemic.
And research by Barclays has shown that the longer we leave our cash in the stock market, the more chance we have to beat other forms of investment.
Why dividend stocks?
For the long term, any stocks that generate good total returns can do just as well. But I prefer ones with good dividend yields.
When I see cash, I know it’s the real test of a company performance. That is, if it’s covered by earnings. Even if I buy more shares with the cash, I think I get more safety from mature dividend payers.
And if I should need a bit of cash one year, maybe for a bit of holiday spend, I can keep it back from my dividends.
Easy and cheap?
I do have to put in a bit of effort to work out my strategy. But since I’ve gone for top quality dividend stocks, I don’t have to do much work to make my choices. So it’s easy enough for me.
To make sense of trading costs, I buy with at least £500 a time, and £1,000 or more is better. But I can put small sums of cash into my Stocks and Shares ISA and save it there until I have enough to buy.
Individual choice
Stocks and shares won’t be for everyone, and each of us has to work out our own approach to risk. But for me, to build a long-term passive income pot, I don’t see anything better.
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AJ Bell are reducing their trading charges next month, making it more cost effective for buying and selling.
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