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The prospect of earning extra income without working more hours in the day appeals to me. One of the ways I try to do this is to own income stocks.
I think building a stock portfolio that pays me regular dividends could even give a four-figure boost to my monthly income. Right now might be a good time for me to start. Here’s why.
seize the moment
Inflation is high and the economy is struggling. This made some investors less fond of income stocks than before. What’s the point of recouping 3% of their investment cost in dividends each year if inflation is three times that level, they ask?
One of the effects of this thinking – and broader market concerns – is that some stocks are priced lower. This drove up their dividend yields. For example, the actions of Sainsbury’s dropped 23% over the past year. This means that the dividend yield is now 6%.
But here’s the thing. I don’t expect inflation to stay high indefinitely. But if I buy 6% income stocks today, as long as the company doesn’t cut its dividends, I could still earn 6% of my investment years from now when inflation returns to much lower levels.
Build a portfolio of distributing stocks
However, the risk of a lower dividend still exists. After all, high inflation can also hurt a company’s profits, causing it to pay out less money to its shareholders.
To try to reduce the risk of my dividend income, I do two things. One is to diversify my investments across a range of stocks. The second is to focus on finding great companies with attractive returns, not great returns from unattractive companies.
Stock hunt to buy now
Many stocks have recently fallen in price – but they could fall further.
However, rather than trying to time the market, I am taking the opportunity now to chase revenue shares. If the potential return is already attractive to me, the fact that it could get even juicier if I wait a few months or years to buy doesn’t seem relevant to me. A stock price could suddenly rise again and I might have completely missed the opportunity by being too greedy.
So I’m taking advantage of recent market volatility to try to find income stocks I can buy. I look for companies with a competitive advantage that I believe can help them make big profits in markets with long-term customer demand. After all, profits fund dividends.
Aim for £1,000 a month from Income Stocks
Although dividend yields aren’t the focus of my hunt, they help determine how much I need to invest to try and reach my monthly target of receiving £1,000 in dividends.
At an average return of 5%, for example, I would need to invest £240,000. If the average return was higher, I could invest less. But I always looked for stocks based on the attractiveness of a company’s prospects, not just the yield.
If I didn’t have that money, I could still take advantage of the current opportunity to increase my income by buying income stocks. I would just like to reach the monthly goal more slowly.