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Here’s how I’d invest £250 a month in the best dividend shares now to make a passive income

Peter Stephens
·3-min read
Hand holding pound notes
Hand holding pound notes

The best dividend shares to buy now may not necessarily be those offering the highest yields to passive income investors. Such businesses may fail to deliver strong dividend growth. Or they could have high yields because of a low share price caused by weak financial performance.

As such, identifying stocks with sound dividend growth prospects and solid market positions could be a better idea than simply buying high-yielding shares. Over time, they could produce a generous income return from a modest monthly investment.

Investing money in the best dividend shares now

Buying the best dividend shares now may not seem a worthwhile move for some passive income investors. They may be concerned about the economy’s prospects. Or they feel a more attractive buying opportunity may come along after the stock market rally in the final three quarters of 2020.

However, a number of income shares continue to offer good value for money. Investor sentiment towards sectors such as consumer goods, energy and financial services hasn’t yet fully recovered to 2019 levels. Therefore, it’s possible to buy dividend shares in such sectors at low prices that could translate into high returns in the long run.

Moreover, many of the best dividend shares offer the potential for a growing passive income in the long run. For example, they may have a competitive advantage over their peers. Or they could have a sound strategy through which to generate improving financial performance.

Over time, this may help to increase their market valuations, as well as their dividends. This may result in an increasingly attractive income opportunity.

A long-term approach to making a passive income

Of course, making a passive income in 2021 is very achievable through buying the best dividend shares now. Many FTSE 350 stocks have a potent combination of relatively high yields well covered by profit, dividend growth potential, and a solid track record of making shareholder payouts despite varied economic conditions.

Buying such companies with a modest monthly investment throughout 2021 could produce a high, and growing, income return.

However, the long-term opportunity from dividend stocks may be even more compelling than their relatively high yields in 2021. They could gain in popularity compared to other income-producing assets in an era of low interest rates. This may lead to impressive total returns relative to the wider stock market that produces a large retirement nest egg.

For example, investing £250 per month could produce a generous passive income in the long run. Even by achieving the same 8% annual total return as the stock market has delivered in the past. It could be worth £375,000 within 30 years. From this, a 4% withdrawal equates to an income of £15,000 per year.

However, by investing in the best dividend shares on a regular basis throughout 2021 and beyond, it’s possible to outperform the market and enjoy an even more attractive income return in the long run.

The post Here’s how I’d invest £250 a month in the best dividend shares now to make a passive income appeared first on The Motley Fool UK.

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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 2021