Just because the market is falling, I don’t have to simply sit on my hands until the next bull market arrives. Sure, it’s never nice to see stocks in the red in my portfolio. But as an income investor, I can actually take advantage of moves lower to pick up better dividend yields for long-run passive income. Here’s my plan of action.
Why a fall isn’t a bad thing
To understand why I want to invest £100 a week in stocks even when the market is falling, I need to understand the dividend yield calculation. It’s comprised of the dividend per share and the current share price. Usually, the dividend per share only changes a couple of times a year. But the share price changes every day!
So, if the share price falls but the dividend stays the same, the dividend yield increases. At this point, I can buy the stock and benefit from this yield enhancement. I’m still open to the risk that the dividend per share changes in the future. Yet this is both a risk and a potential reward. The dividend payment might increase, it’s not always going to be cut.
Over the course of the next few years, taking advantage of a falling stock market by increasing my exposure to income stocks is a smart play. Not only do I manage to pick up income during tough times, but in the long run I should expect the share price to also rally.
Using £100 a week to build passive income
From my calculations, I should be able to find £100 a week to invest. I’ll need to cut back on some spending, but ultimately I don’t think it’s an unrealistic target to aim for.
With the money, I’m going to set a filter to help me find the right stocks to invest in. I’m filtering for any stocks that have paid out a dividend for at least the past three consecutive years. I’ll add a filter for any of these shares that have also fallen by at least 10% in the past month. I do need to take into account the longer-term share price movements. But for the purpose of this strategy, I want to snap up a falling stock quickly.
If I reinvest all my dividends, my total pot can grow to make me some chunky passive income. If I manage to average a yield of 6% over the next 10 years, I’ll have an account value of just over £66,000. If I want, I can then enjoy income of £3,960 a year going forward!
Clearly, I do need to be aware that buying a stock that’s falling is risky. It could continue to fall after I buy it. If I have to sell the stock in the near future for a particular reason, I could sell at a loss. But I’m trying to lower this risk by holding for the long term. I’m also diversifying the shares I invest in. In my opinion, it’s a manageable risk when I consider the rewards.
The post How investing £100 a week in falling stocks can make me chunky passive income appeared first on The Motley Fool UK.
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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.