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One way I aim to earn passive income is by buying stocks that can pay me a profit. But companies pay different amounts – sometimes nothing. So, if I have a specific target in mind, how much should I invest in dividend stocks?
Here’s an example where I set a target of £100 per month to answer the question.
The role of dividends
The straightforward answer to that question is that my investment level depends on the average return on the stocks I buy.
Yield is the amount I earn per share each year as a percentage of the price I pay for the shares in question. For example, if I put £100 into shares and get £7 in dividends from them every year, the return is 7%.
But two things affect this calculation. First, dividends are not guaranteed. So saying “7% yield” The company assumes that it holds its current dividend. That can happen. For example, that in Smith and Nephew In recent years. But a firm can reduce its dividend. Or he can raise it, as Cranswick He did it every year for more than three decades.
The role of stock price
The second assumption is that my returns may be different from those of other investors even if I own the same dividend stocks. This is because the yield depends on what one pays for the shares.
So if I buy the shares for £100 with an annual dividend of £7, I hope to get 7%. But if I wait and the share price goes up to £200, then buying it will only give me a 3.5% yield.
Focus on quality dividend stocks
But when buying stocks, don’t just focus on the product. After all, dividends are not guaranteed. High yield, for example, is currently offered at 18% PersimmonSometimes investors think a company might struggle to keep up the momentum. In Persimmon’s case, that’s because rising interest rates could hurt sales and profits.
So I focus on finding a competitive advantage that I think can help differentiate quality companies from their competitors. This allows a company to make a profit, which can pay the bills. After finding companies that I think have such assets, I consider their stock price – and yield.
Going to the target
If my target is £100 a month in this type of income, that adds up to £1,200 every year. That, for example, would require me to invest £24,000 at an average yield of 5%. Depending on the average product I buy, I may need more or less.
But I don’t buy what I think are low-quality stocks just because I want to hit a low-budget dividend target. My focus is always on finding quality companies. When I invest in their stocks, if I don’t have enough money to hit my income target, I can lower my target.
Hopefully, over time, by combining my pieces, my money to invest can grow over the years. That will allow me to hit my target sometime in the future.