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Here’s how I’d generate a passive income with UK dividend stocks

Rupert Hargreaves
·3-min read
Cute dog in funny colourful jester cap.
Cute dog in funny colourful jester cap.

I think there are some tremendous bargains in the world of UK dividend stocks right now. And I’m looking to take advantage of this discrepancy. I reckon that by acquiring a basket of these companies, I can generate a passive income to cover at least a portfolio of my living costs.

UK dividend stocks

I think finding the market’s best dividend stocks requires time and patience. It’s not as easy as finding the highest yield. In some cases, stocks have high yields because the market believes the payout is not sustainable. More often than not, the market is right.

With that in mind, I like to stick with firms that have high yields and low payout ratios. I think these companies are the best candidates to create a passive income stream.

Put simply, a low payout ratio suggests the firm in question is only paying out a modest portion of its income. A payout ratio of 75% or less suggests to me that the business can support the company’s distribution.

But this does not mean that I have a limited universe of companies to buy for a passive income portfolio. In fact, my research suggests there are at least 150 companies in the FTSE All Share with payout ratios of 75% or less.

Some examples of these top UK dividend stocks include Sage, Britvic, Games Workshop and BAE Systems. A portfolio of these four companies equally weighted would provide a dividend yield of just under 3%. Compared to interest rates available on most high street banks’ savings accounts today, I reckon this level of income looks incredibly attractive.

Generating a passive income

Buying UK dividend stocks could be one of the best ways to generate a passive income for life, according to my research.

When I’ve found the dividend stocks to buy, all I have to do is set up a regular investment plan.

This process can be relatively straightforward. Most online stock brokers now offer a regular investment plan, which allows investors to put away a set amount every month.

How much I decide to put away really depends on my personal savings and investing goals. I’ve found it’s a good idea to set out an income target and then work towards that goal.

For example, my living costs work out at around £500 a month. That’s equivalent to an annual sum of £6,000. Using the UK dividend stocks outlined above, my figures suggest I would need a total investment portfolio of £200k to generate an attractive passive income stream that suits my lifestyle.

With this target in place, it’s easier to lay out a savings and investing plan to help me reach it.

Investing for growth could help me hit this objective faster. While the corporations outlined above only yield around 3%, some growth stocks could produce significantly higher returns on my money. Return rates of over 20% are not uncommon.

Finding these high-growth stocks may help me hit my passive income target in a shorter time frame.

The post Here’s how I’d generate a passive income with UK dividend stocks appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Britvic and Sage Group. 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 2020