Stocks that pay out dividends allow me to receive income that can be considered passive. After all, once I own the stock I don’t have to put in much (if any) effort to receive this money. But I might think that it’s hard to start making passive income from stocks simply because I don’t have a large amount of cash right now to invest. This isn’t true.
Building up my positions over time
The conventional way to make passive income from stocks is to purchase the shares and then enjoy the benefit of the dividends. I need money at the beginning to make this happen. For example, if I wanted to make £100 a year from a company with a dividend yield of 10%, I’d need to invest £1,000.
If I don’t have £1,000, this doesn’t mean I should forget the idea. Instead, I can look to build up to this position over time. In the above example, I could instead look to invest £100 a month. Within a year, I would have accumulated the £1,000 needed to earn the passive income I wanted.
The drawback of this method is that I won’t get the full benefit of the dividends straight away. It’s only after I have built up my position that I’ll earn the same amount going forward as I would have done if I’d invested the lump sum upfront.
Yet the benefit of this is that it helps me with my cash flow. The other benefit is that I can purchase the same stock multiple times during the year. This allows me to average-in my purchase price.
Rebalancing my existing portfolio
Another way that I can make passive income from stocks without having a lot of cash is to look at my existing portfolio. For example, my existing stock holdings via my ISA could include growth stocks. Typically, high-growth companies don’t pay out a very big dividend. Rather, the profits are reinvested into the company to support further growth.
What I could do is look to trim down my exposure to these stocks and sell some shares. The cash that this frees up could then be invested back in dividend-paying stocks. And if I keep all of this within the ISA, I won’t have to pay any capital gains tax from the sales.
This doesn’t change the overall value of my portfolio, but does allow me to start making passive income from stocks without having to put any more of my own cash in.
The risk with this is that it might be hard to choose which existing stocks to sell. I wouldn’t want to prematurely sell stocks for a loss. This might limit how much money I have to reinvest in dividend stocks if I’m sitting on losses already.
Staying flexible
Just because I might not have a large cash pile right now doesn’t mean that I’m unable to make something happen. By looking to invest smaller amounts and building positions over time, or by reallocating cash from existing investments, I can increase my passive income from stocks.
By doing this, I can enjoy the benefit of dividend income in the years to come.
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jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. 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.
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