I believe developing a profitable passive income strategy is the best way to make money while I sleep. Some people spend a lot of time and money building side hustles to generate a second income, but I’d rather focus on investing in high-yield dividend stocks.
Building a second income of £10,000 a year won’t happen overnight. First, I need savings put aside to get started. Then, I must find a well-established company with a reliable track record of paying high-yield dividends. After my initial investment, I will keep making monthly contributions to increase my investment and maximise returns. Finally, I will compound my investment by adopting a dividend reinvestment plan (DRIP).
Many UK companies pay out annual dividends of between 5% and 10% to shareholders in two or four increments a year. For example, if I have 100 shares in a company with a 5% dividend yield, I would accrue an extra five shares throughout the year. However, dividend yields fluctuate and a company can choose to not pay them at any time, so profits aren’t guaranteed.
The company I’m looking at
Imperial Brands (LSE:IMB) has a share price of £18.50 and pays out a dividend yield of 7.9%. I expect its share price to increase by an average of 12% annually, and its dividend yield to reach 9.1% in three years. By my calculations, if I buy 700 shares combined with monthly contributions and reinvested dividends, I could achieve my goal.
For the initial 700 shares, I’d spend £12,950 of savings. I’d then invest a further £200 a month for the next 10 years.
I would compound my gains with a dividend reinvestment plan that puts my payouts back into my portfolio.
In 10 years, I estimate my investment could grow to £145,000. This would pay me out annual dividends worth around £10,000. That equates to a sizeable second income of £833 a month.
But will it work?
Despite high debt, I think Imperial Brands is a reliable company with strong financials and a history of consistent growth. Its share price declined between 2017 and 2020 but made an impressive recovery during the pandemic. The group has a progressive dividend policy that saw its dividend yield increase by 4% between 2022 and 2023. This is expected to increase even further in the coming years.
My only concern is a slightly volatile history of dividend payments that equates to a dividend payout ratio just below 60%. That means I could miss out on two in every five dividend payments if the ratio doesn’t improve.
Still, it has sufficient earnings to cover dividends and a yield that’s in the top 25% of dividend payers in the UK market. That makes Imperial Brands a strong contender as the stock of choice for my passive income strategy.
The post I’m considering 700 shares of this UK stock to aim for £10,000 a year in passive income appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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More reading
Should I buy Imperial Brands shares for the 8.5% dividend yield?
8% dividend yield! Could Imperial Brands be a great FTSE 100 value pick for 2024?
A 6.9% yield but down 15%! Should I buy this FTSE 100 stock for 2024?
9% dividend yield for 2024? This FTSE 100 share is super cheap
Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc. 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.
