One decent way of aiming for gains from the stock market is to harvest the income from dividends in a passive way.
If stocks are chosen with care, it’s common for investors to enjoy an increasing stream of dividends and gains from a rising share price. All that progress will likely be driven by the success and growth of the underlying business over time.
Compounding gains in the long run
But time is key. Dividend investing isn’t a frenetic, caffeine-fuelled investing strategy like some others. This is more like lazing on the river with glass of something nice and a big sun hat — laid-back and unruffled.
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Nevertheless, the long-term outcomes can still be impressive. Compounding modest gains and reinvesting dividends can lead to some big percentage increases in a portfolio as the years roll by.
I’d start by committing regular monthly sums to my investment portfolio. So that means prioritising as much money as possible without compromising my current lifestyle. The next step is to invest regularly in dividend-paying shares.
But which ones? Right now, my watchlist has several worthy of further research and consideration. For example, I like the look of online trading platform provider IG group. With its share price near 925p, the forward-looking dividend yield is around 5.4%.
I’m also keen on renewable energy assets investment company Renewables Infrastructure. Its anticipated yield is above 7% with the stock near 104p. Meanwhile, in the FTSE 100 index, I’d focus on insurance, wealth and retirement products company Aviva (LSE: AV). With the stock near 478p, the dividend will likely yield just under 8% for 2025.
The stocks mentioned here have an average yield of 6.8%. So, as an illustration, it would take a portfolio worth just under £77,000 to generate £100 in weekly passive income. That may seem like a stretch, but underlying progress from the investee businesses may help a portfolio grow.
Strong progress and a robust outlook
For example, in August, Aviva delivered a decent set of half-year results and a “confident” outlook statement.
Chief executive Amanda Blanc said the Aviva business has momentum, and the directors believe there’s a “strong and compelling” case for investing in the shares.
Aviva is the UK’s leading diversified insurer, Blanc said, and it operates a capital-light business with material international earnings. There are investment opportunities for the future and the firm is seeing strong organic growth in all its markets. On top of that, the company is also driving growth with bolt-on acquisitions.
All true no doubt, but Aviva has risks too. For example the multi-year record for earnings is patchy and the share price chart lacks lustre.
One reason for those weaknesses is that the business has a fair bit of inherent cyclicality and is vulnerable to the ups and downs of the wider economy. It also has a substantial investment portfolio giving it exposure to the stock market.
Nevertheless, despite the risks, I see the stock as worth deeper research and further consideration now for inclusion in a diversified portfolio focused on dividend income.
