With another hike earlier this month, the UK interest rate sits at 4%. This is a very attractive option for me to earn some income from cash on my account. However, the actual rates I can get as a retail account holder are nowhere near 4%. In order to boost my yield, I like to use dividend stocks to generate cash. It’s higher-risk, but can lead to me making significant money further down the line.
Basic principles for dividend investing
The general premise of investing for income revolves around dividend payments. When I buy a stock, I become a shareholder. I’m eligible to receive money from the company. This mostly comes in the form of a dividend, which is usually paid out of the profits from a particular period. Dividend payments can come once a year, or as frequently as each quarter.
The exact amount of money I’ll get paid depends on a couple of things. Importantly, the amount I invest impacts the dividend I get. If I own 10 shares, I’ll clearly be eligible for less dividend income than someone who owns 1,000 shares.
Further, the dividend per share payment is also a factor. A company might have a good year and pay out 10p per share, another firm might only pay out 1p per share. The size of the dividend therefore make a large difference.
Fortunately, an easy calculation exists to make my life more simple. It’s called the dividend yield. This works out as a percentage the dividend per share relative to the current share price. Usually, the higher the yield, the more I’d want to own the stock.
How I could make serious cash
To make a lot of money, I could simply pick the highest-yielding options from the FTSE 100 and FTSE 250. Both indices have constituents that have a yield above 16% at the moment.
Yet a risk with dividend investing is that in the future, a company stops paying out income. This could be due to the business falling on tough times. If I see a yield above 10%, I’m a bit cautious that this might be the case. If the share price has fallen, it can artificially push up the yield to unsustainably high levels.
This doesn’t mean that I can’t make serious cash. I just need to own a diversified portfolio of stocks, so that if one blows up, I can deal with it.
To this end, I’m going to target a high yield, but not ridiculously so. An average yield of 7% is my goal. If I invest £600 each month and reinvest any dividends I get paid, my portfolio can compound quickly. After 12 years, I could start to take the dividend payments and enjoy them. By this stage, my portfolio would be worth over £127k, generating me just under £750 a month in year 13 onwards.
The post How hot dividend stocks could make me £750 a month in income appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has 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.