For many people, the thought of earning money without having to work a single hour is the ultimate dream. However, what most don’t know is how to actually achieve this. So today, I’m going to take a look at how inventors can build a healthy passive income stream with some of the best FTSE 100 dividend stocks on the market.
The benefits of a passive income stream
At its simplest, building a passive income stream means earning money without having to work for it. Not only does a passive income free up more of your time, but it also allows you to achieve financial independence with very little effort.
In my view, one of the best ways to build a solid passive income stream is through investing in dividend stocks. After all, it’s a tried and tested method with many advantages.
One of the greatest benefits is that not much money is needed to begin with. In fact, I could start earning a passive income by investing as little as £100 a month. If you’re able to set aside a higher amount, that’s great. But if not, getting into the habit of regular saving is how I’d go about creating a passive income.
What to look for in a good dividend stock
When looking to build an income stream through investing in shares, I’m on the lookout for companies that boast a bulky dividend yield. To put it simply, a higher yield is likely to mean a higher dividend payout. That said, it’s important to note that a bulky yield alone does not always indicate a worthwhile investment opportunity.
That’s because there are plenty of other factors to consider. For example, how safe is the dividend payment? Ultimately, if a company isn’t in a financially strong enough position to safely cover its dividend payout with its earnings, I’d stay away and look for opportunities carrying less risk.
The best FTSE 100 dividend shares
For me, some of the best dividend stocks are companies in defensive industries. Such businesses are better positioned to weather economic downturns and generally experience less volatility. That’s even more important to me given the current macroeconomic climate.
Therefore, I’d be inclined to focus on businesses such as British American Tobacco and Imperial Brands Group. Despite their status as so-called ‘sin stocks’, both companies benefit from a near constant demand for their products. With yields of 7% and 9% respectively, both are well-suited for building a passive income stream through dividends.
Similarly, healthcare and pharmaceutical giant GlaxoSmithKline stands out to me. As well as attracting a safely covered 5% yield, I think there’s plenty of room for growth in the company’s share price over the long term. As such, I’d be looking to profit from a combination of dividend payments and share price appreciation.
The magic of reinvesting dividends
Let me mention one final thing: the wonders that arise from reinvesting your dividends. In the beginning, payouts might appear fairly unsubstantial. Nevertheless, as your dividends begin to pile up, you can use them to invest in more shares.
Given enough time, this process can allow for your profits to explode as your returns compound over time. As a result, I’d continue targeting the best income shares in the FTSE 100 to help me grow a bumper passive income stream.
The post How I’d start earning passive income from the best FTSE 100 dividend stocks appeared first on The Motley Fool UK.
Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Imperial Brands. 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