Investing in dividend stocks is an easy way to generate passive income. These stocks pay investors cash distributions on a regular basis out of company profits.
Here, I’m going to illustrate how I could generate £1,000 per year in passive income with Unilever (LSE: ULVR), a dividend stock listed on the London Stock Exchange. I already own this particular stock and plan to keep building up my position over time.
What I need to do
Unilever is a consumer goods company that operates in the areas of beauty and wellbeing, personal care, home care, nutrition, and ice cream. A well-established blue-chip company, it’s a very reliable dividend payer.
For 2022, Unilever is projected to pay out 171 euro cents (the company reports its financials in euros even though it’s listed on the London Stock Exchange) per share in dividends to investors. At today’s GBP/EUR exchange rate, that equates to around 149p per share.
What this means is that to generate £1,000 per year in passive income from Unilever shares, I’d need to own 671 shares (worth around £27k at today’s share price).
Right now, I own 85 Unilever shares, so I have a long way to go to build up my required position. However, I think 671 shares is an achievable target over time. I have 15-20 years until retirement (when I’ll need the passive income), so I have time on my side.
If I keep chipping away and adding to my holding on a regular basis, I think I can reach my goal in the long run.
Dividend growth could get me there faster
It’s worth noting that there are a couple of variables to consider here. One is dividend growth. Unilever tends to increase its dividend payout on a regular basis. For example, in 2021, it raised its dividend by 3%. If it was to keep lifting its payout in the years ahead (assuming constant exchange rates), I would need less than 671 shares to generate £1,000 per year in passive income.
This goes both ways though. If it was to cut its dividend in the future for some reason, I would most likely need a bigger share allocation to generate that level of passive income.
Another variable is the GBP/EUR exchange rate. Fluctuations in the exchange rate could have an impact on how many shares I’d need. If the pound was to weaken against the euro, it would benefit me as a UK investor, as my dividend payments would be larger. By contrast, if it was to strengthen, it would work against me.
The smart way to generate passive income
I will point out that while I plan to build up my Unilever position going forward, it’s not the only dividend stock I will be focusing on.
There’s always the chance that Unilever’s share price could fall over time. There’s also a chance it could cut its dividend at some point. So I wouldn’t want to have all my eggs in one basket.
That means I’ll be investing in many different dividend stocks in my quest to generate passive income. Doing this will lower my overall portfolio risk significantly and give me the best chance of success.
The post If I buy 671 shares in this company, I’ll generate passive income of £1,000 a year appeared first on The Motley Fool UK.
Edward Sheldon has positions in Unilever. The Motley Fool UK has recommended Unilever. 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.
Motley Fool UK 2022