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The prospect of earning money without extra work has been attractive every year. But not every passive income plan works every year.
His own approach to generating passive income involves investing money in stocks that can pay dividends. I hope it works well for me in 2023.
Dividend yield and income stream
An important concept to understand when it comes to stocks is dividend yield. Basically, it helps me understand how much money I should get in dividends each year from holding a certain stock (if the company keeps paying, which is not guaranteed).
Precedent, Tesla does not pay dividends, so it has a yield of 0%. Tesco it yields about 4.8%, which means I should be getting about £4.80 in annual dividends for every £100 I invest in shares now. Gas company Energy Diversification yields around 13%. So if I put £100 into shares a day, hopefully I’ll generate around £13 of passive income per year.
So should I just try and maximize my income by buying the highest yielding stocks? Of course not! Remember, I said above that dividends are never guaranteed.
As an example, Diversified experienced losses last year and the year before. But raise the dividend in two years. I think the business model of buying old wells is still unproven. There is a risk that the dividend will be cut in the future.
Hunting for quality
So, instead of just focusing on results, what should I look for when implementing a passive income plan? I maximize the company’s future ability to pay dividends. Are there some competitive advantages in areas that I expect customers will continue to demand?
If the answer is yes, I will consider the stock price. After all, even a large company can make an unrewarding investment if I pay too much.
As an example, I think Scientific Jury has a very good business model. But the current share price makes it too expensive for my taste. The current share price means that Judges has a dividend yield of just under 1%.
I’m excited about 2023
What makes 2023 a good time for me to take this approach? I’m excited about 2023 because many blue-chip stocks have high yields right now. With inflation at high levels, many stocks are falling and yields are rising.
In the next few years, if inflation falls back to normal levels, I’d be surprised to see many FTSE 100 blue-chip stocks returning 6%, 7%, 8% and higher. But now, I can get such results for my portfolio!
Generate passive income
So, after hunting for stocks that fit my criteria, how can I start getting them? My passive income plan is simple. I will put money into buying dividend stocks that I have identified. That may be in the form of a lump sum, or by drip-feeding money regularly into a share account.
Either way, hopefully if I do, I can start earning passive income. If I hold these shares, they may pay dividends not only in 2023 but far into the future.
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