Establishing streams of passive income is a surefire way to unlock a more comfortable lifestyle. After all, those who are able to make money while sleeping don’t have to work as much during the day.
Some could even pack up their careers far earlier than initially planned, spending the rest of their lives indulging in holidays, family outings, and excursions.
Dividends are one of several methods at investors’ disposal when pursuing this target. Unfortunately, income stocks aren’t free. And they can require a considerable sum of capital to be invested before a meaningful passive income is established.
Those fortunate enough to have a nice chunk of change already in the bank through prudent saving or inheritance get to enjoy a considerable headstart. But for investors without this luxury, unlocking a £1.2k monthly passive income is still achievable in the long run.
Earning an extra £1.2k
Looking at the FTSE 100, the UK’s flagship companies have historically delivered an average dividend yield of around 4%. That’s certainly not terrible. But with savings accounts now offering similar rates, the added risk of the stock market doesn’t exactly sound like an attractive proposition by comparison.
However, by being a bit more selective, investors could easily establish a more substantial income stream. In fact, roughly one-third of the FTSE 350 offers a payout greater than 4%, with some even venturing beyond 10%!
Higher yields tend to come with higher risk. But looking at the opportunities in the British stock market today, investors could easily establish a 6%, or even 7%, average portfolio yield without exposing themselves to considerable shifts in risk. At least, that’s what I think.
At 7%, a £100k portfolio translates into a £7,000 annual income, or around £580 a month. That’s hardly life-changing. But the beauty of investing in top-notch income-generating businesses is that dividends can occasionally get hiked. And so a 7% yield today could potentially double over several years, doubling the income to £1.2k in the process.
Of course, it’s important to remember that the opposite’s also true. A firm that runs into financial trouble is likely to slash shareholder payouts. And if not properly diversified, that could be disaterous for a passive income portfolio.
Where to start?
With over 110 high-yielding stocks in the FTSE 350 alone, investors have a wide range of options to choose from. But, personally, one I’m particularly fond of, and hold in my own income portfolio, is Greencoat UK Wind (LSE:UKW).
The business is pretty straightforward. Using its capital, management makes strategic investments in on- and off-shore wind farms across the UK. These farms, in turn, generate clean electricity which is sold to energy companies like Centrica (British Gas).
Of course, periods of calm and other unfavourable weather conditions can be quite problematic. In fact, the firm’s recently seen the impact of this, with cash flow suffering as a result.
Yet, while the weather can be fickle, the ever-increasing demand for green electricity has allowed dividends to thrive. So much so that shareholders have enjoyed nine years of consecutive dividend hikes! And with a yield already sitting at around 7.5% today, this continued upward trend could see this payout expand even further for patient investors.
The post £100k in savings? Here’s how I’d aim to turn that into a £1.2k monthly passive income appeared first on The Motley Fool UK.
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Zaven Boyrazian has positions in Greencoat Uk Wind Plc. The Motley Fool UK has recommended Greencoat Uk Wind 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.