As 2025 approaches, thoughts are naturally turning to the future. For me, building a growing passive income stream is top of mind, with dividend shares making up an important part of my overall portfolio.
Here, I’ll outline my simple three-step dividend plan in 2025.
Obey the five-year rule
Before allocating money to investments in the New Year, it’s essential I’m doing so on a firm financial footing.
How much can I afford to invest without impacting my living expenses or emergency savings? I ask this because it’s easy to get carried away in this age of ultra-high dividend yields in the UK stock market.
For example, I notice the forward yield on FTSE 100 insurer Legal & General (LSE: LGEN) has crept back up towards 10%. That means I could be looking at nearly £200 in passive income next year from a £2,000 investment.
A near-10% yield tempts me to dip into my savings right now and buy more shares for my portfolio!
But I have to stay disciplined. Christmas is coming, which always works out more expensive than planned (at least for me). And my car’s got its MOT in December, and you never know what problem could be found lurking under the bonnet.
There’s no point buying shares if I have to sell them again a few months later because an emergency crops up.
A good rule of thumb is to only invest money one doesn’t need for the next five years (i.e., the five-year rule). This is sufficient time to ride out market fluctuations and benefit from compounding growth.
Invest in blue-chip dividend shares
Dividends are never guaranteed to be paid by companies, while share prices can fall as well as go up. However, I hope to minimise these risks by focusing on high-quality, blue-chip dividend stocks.
Returning to Legal & General, this stock has what I’m looking for. The insurance and asset management stalwart has decades of experience growing its dividend. I value this solid track record.
In H1 2024, we learned that the firm’s Solvency II coverage ratio was 223%, with surplus of £8.8bn. This indicates the company’s capital position is very robust.
Admittedly, the share price has been disappointing this year, falling around 11%. And the UK economy isn’t exactly firing on all cylinders. Were a downturn to occur, that could lead to reduced consumer spending, potentially impacting the firm’s insurance and savings businesses. So that’s a risk to consider.
Longer term, I still believe the company is well placed to capitalise on the UK’s ageing population. This should lead to increased demand for pension and retirement products.
With the forward yield approaching 10%, and management committed to modest increases in future, this is one I can see myself adding to in 2025.
Stay diversified
While I’m bullish on the stock, I have to accept that it could turn out to be a disappointment long term.
Therefore, diversification is crucial. My portfolio contains dividend stocks, a handful of investment trusts, and growth shares (some of which also pay dividends).
It might be tempting to go all-in when I see a massive yielder like Legal & General. However, I also like to sleep well at night. Making sure my portfolio is well-rounded will therefore remain very important in 2025.
The post My simple 3-step passive income plan for 2025 appeared first on The Motley Fool UK.
But this isn’t the only opportunity that’s caught my attention this week. Here are:
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Cheap FTSE 100 shares to consider buying after the Black Friday sales
3 crucial factors for building my passive income
Here’s how the Legal & General dividend yield could ultimately hit 15%!
9.3%+ yields! 3 FTSE 100 dividend giants to consider buying
Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now
Ben McPoland has positions in Legal & General Group Plc. 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.
