How I’m looking to build passive income in 2023 with dividends

Most people see the stock market as one of the best ways to increase their wealth. But it can also be one of the most effective ways to generate a second income, possibly bringing the investor to financial independence, where passive income includes expenses.

Even if they only invest a smaller amount, by choosing a quality company, investors can make their money harder than in a savings account, using the power of dividend paying shares to reliably increase their income.

Create passive income with dividends

For those new to the concept of dividends, think of them as a reward for holding each share of a company, paid in cash usually quarterly. A company may decide to use its earnings to pay dividends to attract new investors. While others choose to reinvest in developing the company.

Average dividend yield in 2019 FTSE 100 (UK’s top 100 companies) is 3.57%, which means that by investing £1,000, investors can expect to earn £35.70 per year. This cash payment will be in addition to the growth in the price of the shares owned. This means there are two potential ways to increase your net worth in one investment!

Investors should be sure that the company’s stock performance is also satisfactory. Otherwise, the dividend can only compensate for the decline in the value of the shares owned by the investor.

I’m a big fan of owning stock in companies I use every day. If investors can use the company’s dividends to support their day-to-day spending, then there is a significant shift from just being a customer to seeing the real benefits of owning a part of the business.

For example, assume that an investor spends the average UK £107 per month on petrol for their car. If this investor has shares worth £3,000 BP with a dividend yield of 3.83%, they can receive a free month of fuel each year with approximately £114.90 paid out each year in dividends.

This can be done in the same way as your favorite utility provider, bank, or store, all with the goal of building passive income that can eventually cover your spending, allowing investors to use their income primarily for the things they love!

My passive income plan 2023

I want to cover £1,000 of monthly expenses with passive income by 2023, mostly in the form of dividends. To achieve this, I will need a 5% dividend yield on my investment. This should be possible due to the number of quality companies in the market.

When looking for quality dividend paying companies, I always look for the following:

• Strong cash reserves and healthy cash flow;
• expected long-term earnings growth;
• Low debt to equity ratio (below 2);
• Strong track record of high dividend yield (over five years);
• A healthy corporate base in a strong sector;
• A realistic and sustainable dividend yield (3-5%).

Conclusion

Dividend-paying stocks have a place in most investors’ portfolios, but especially for those looking to generate passive income. By 2023, I will increase the percentage of expenses protected by dividends from the quality companies I use every day, and continue to get closer to financial independence.