How I would invest £400 a month to maximize my passive income potential

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The reason I invest is to generate profits. This may be due to share price appreciation or through the collection of dividends. I need to balance risk with reward when considering new investments. Yet, ultimately, my goal is to maximize my profit potential. When I consider passive income from dividends, this is how I try to squeeze all the juice out of the lemon!

Be active in targeting actions

I see little point in buying an income fund that pays me the average dividend yield of the FTSE 100. The current yield of the index is 3.9%. At first glance, I might think that’s a reasonable payment for my money. But when I aim to maximize my potential, that’s just the benchmark I’m trying to beat.

At a very simple level, I could increase my dividend potential by putting, say, £400 a month into Barclays with a dividend yield of 4.05%. Obviously, that wouldn’t be a good choice because all my eggs are in one basket. Still, it shows that by moving away from a generic fund, I can win. Being active in my investment choices should allow me to increase my average dividend yield.

High Yield Options with Diversification

Generally, companies that have very high returns carry a large amount of risk. For instance, Synthomere had a dividend yield of 16.3% until recently. This was based on the previous year’s dividend payments. The yield was rising rapidly because the stock price was falling. Although it looked attractive to buy, the risk was that the dividend would be reduced due to the difficulties of the company. The company has now suspended dividends until the end of 2023.

This emphasizes that even if I want to grow my money, I have to be selective in the high yield options I choose. In order to reduce my risk, I want to invest my £400 each month in a range of different stocks. Over time, this will allow me to diversify my income portfolio and prevent a dividend cut from ruining my entire income stream.

Since I will be investing for the long term, I am happy to accumulate up to 20, 30 or even more shares. I have to make sure I have enough money in a business to make a difference. But other than that, there’s no reason not to add new ones.

Passive Income Goals

With £400 a month I think I could achieve an average return of 7%. Higher and I think it’s too risky, lower and I feel like I’m leaving money on the table.

Over time, my regular investments should really add up. Let’s say I manage to stick with that for the next decade, reinvesting dividends as I get them. After that period I could sit back and enjoy £4,900 of passive income every year in theory. None of this is guaranteed, of course, but I still see it as an incredibly attractive strategy.

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