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Work, work, work. Whether you enjoy working out or not, the idea of spending several hours each week working out is often appealing. But what appeals to many people, including me, is the idea of making a little extra money every month. That’s why one of the passive income ideas I use is investing in dividend stocks.
I had a specific target in mind for the income I wanted to try and achieve each month, say £100. Although I have never invested in the stock market before, here are the steps I take to do so by buying dividend stocks.
Step one: Prepare to buy shares
I have to buy shares to get dividends. But before I do that, I need to do some housekeeping to get ready for business.
So, for example, I set up a Stocks Distribution Account or Stocks and Shares ISA. That way, if I have money and know what kind of dividend I want to buy, I’ll be ready to take action.
Step Two: Set a monthly passive income goal
Different companies pay their dividends according to their own schedules. Some pay only informally or not at all. After all, dividends are never guaranteed.
So while I can typically target stocks that pay off in a few months, I find it easier to target Average £100 per month instead of the same amount every month. This adds up to £1,200 over a year.
The future income from the shares depends on what is known as their dividend yield. That’s basically the annual dividend I should receive as a percentage of the price I pay for the shares. If I invest in stocks with an average yield of 5%, I would need to invest £24,000 to hit my target. If the average yield doubles by 10%, I only need to invest half – £12,000.
Step three: Choosing the right dividend for me
So does that mean I should just go for high yielding stocks?
Absolutely without further ado! Buying a share is like buying a small piece of a larger company. Bp Or Apple. Dividends of 3.9% and 0.6% for the two companies respectively do not tell me anything about the business itself.
Following the thinking of billionaire investor Warren Buffett, I adopt the mindset of an investor buying a small business. So I’m looking for a business environment that I understand and expect to see strong customer demand in the future. Then I try to find companies that are competitive in that industry. I also check to see if they have significant debt or other spending obligations that prevent them from using it to pay dividends.
Step Four: Start shopping and earning
If such dividend stocks are available to me at attractive prices, I can start building my income generating portfolio.
As with dividends, however, the company’s promises are never guaranteed. So I try to reduce my risk by investing in various dividend stocks.