In a world of low interest rates, holding my money in cash gives me limited advantages. It’s always good to have some cash for an emergency, or to save for a holiday or other large expense. But excess cash on top of this doesn’t work that hard for me. With these funds, I’d much prefer to invest in top UK dividend shares to generate passive income in the process. Here’s how I’d go about it.
Being selective on UK dividend shares
One key point is that the income I get from a dividend share changes over time. Although large businesses like to try and keep payouts fairly similar to show consistency, things do crop up. The pandemic was an example here. Many FTSE 100 companies reduced or completely cut their dividend payments for a time to help cash flow.
When I’m looking at generating £1,000 from top UK dividend shares, I need to be aware that it’s not an exact science. What I can do to try to reduce the volatility of my payments, is to pick stocks that I think are well placed in growing sectors. Another option is to look for sectors where growth might be limited, but contain mature companies that use dividends as a way to attract investors.
Bringing it all together, I’d focus my hunt for top UK dividend shares on sectors such as housing, financial services, healthcare and renewable energy. I’d split my money between sectors and pick one or two of my favourite stocks from each. This gives me diversification and avoids me being overly exposed to one company cutting a dividend in the future.
How I’d get to £1,000 a year in passive income
The current average FTSE 100 dividend yield is 3.5%. When I’m looking to target the top UK dividend shares, I’d expect to be able to boost my average yield to around 5%. Some stocks offer me yields closer to 10%, but as mentioned above I want to be selective in picking firms that I think are sustainable. In this way, a high yield doesn’t always mean a sustainable yield!
With a 5% average yield, I’d need to invest £20,000 as a lump sum to get to £1,000 a year in income. This isn’t an unachievable amount of cash to have ready to deploy, but is still a fair chunk.
As an alternative, I can look to invest £500 a month into the market to build up to a £20,000 pot. This would take me 40 months to do, or three and a bit years. So even if I want to build my way up to this goal, it wouldn’t take a very long time to get to. The benefit here is that I can ease the pressure on my cash flow by committing to a regular amount each month.
On balance, top UK dividend stocks can allow me to reach my passive income goals.
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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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