Here’s how I’d invest £3,000 into dividend stocks to generate passive income for life

Dividends can offer a regular and reliable additional income. Our writer outlines three steps for investing in these cash-giving stocks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Front view of a mixed-race couple walking past a shop window and looking in.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Dividend stocks can be an excellent method of producing a second income. In fact, it’s probably one of my favourite ways.

There’s much to like about these investments. For instance, they offer regular income. Like clockwork, every quarter, I’d receive regular cash inflows in the form of dividends. And over time, I’d also expect the underlying value of my stocks to rise.

These are ultimately businesses that I’m investing in. And the dividends they send to me are a share of the profits.

Should you invest £1,000 in Next right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Next made the list?

See the 6 stocks

There are three steps to successful dividend investing, in my opinion.

Eggs in multiple baskets

First, I’d diversify my portfolio. There are great risks to just buying one or two stocks. If a crisis hit one of my companies, it would have a significant impact on my total pot.

And protecting the investment pot is key. After all, investors need money to make money.

To avoid putting all my eggs in one basket, I’d look for a selection of stocks. I’d also want to spread my money across several industries to reduce my risk further.

Thinking ahead pays dividends

Next, I’d need a long-term mindset. Although I receive dividends regularly, the bigger money is made if I can stay invested for many years.

Instead of taking out the dividend income every quarter, I’d reinvest it by buying more shares. Then next year, I’d earn dividends on these new shares as well as on my original investment.

This process is an effect called compounding, and it should result in amplified returns.

The table below demonstrates what I mean.

It’s quite feasibly to find a basket of stocks that offer a 7% dividend yield. I’d say several of the biggest and best ones reside in the FTSE 100.

If I invested £3,000 in these, I’d expect to earn around £210 a year in dividends. Not bad, but also not enough to be considered a second income, in my opinion. But if I can invest this sum every year, I’d expect the results to be significantly better.

Note how dividend income really ramps up in the latter years. By continuing this process for 30 years, I’d expect to earn almost £20,000 a year in dividends. This would certainly make a useful lifetime passive income.

YearsTotal ValueDividend income
5£17,252£1,207
10£41,449£2,901
20£122,986£8,609
30£283,382£19,836
Compounding dividend returns

Finding the best dividend stocks

Finally, I’d need to pick some suitable dividend stocks. A high yield doesn’t necessarily mean it’s a good stock. In fact, it may only be temporary. Instead, I’d look for consistent, growing dividends. This might indicate that the company is profitable and stable.

As dividends are typically paid from earnings, I’d want my companies to demonstrate strong financial health, and a solid business model.

Right now, I consider the following to be good UK dividend stocks that meet my criteria: Phoenix Group, Legal & General, NatWest Group, Schroders, and Imperial Brands.

This selection of five currently offers a 7% dividend yield. And if I had spare funds to start a new dividend investment plan today, I’d buy all five today.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc and Schroders Plc. 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.

More on Investing Articles

House models and one with REIT - standing for real estate investment trust - written on it.
Investing Articles

3 top REITs to consider for long-term passive income

Discover three top REITs that Royston Wild believes will keep delivering healthy passive income flows, including a FTSE 100 heavyweight…

Read more »

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

Billionaire Bill Ackman just bought this world-class growth stock for his FTSE 100 fund

Bill Ackman just snapped up 5,823,316 shares in this mega-cap growth stock for his fund. Is it worth buying for…

Read more »

ISA coins
Investing Articles

2 high-yield UK investment trusts to consider for a Stocks and Shares ISA right now

With 5%+ yields and decades of payout growth, these UK investment trusts could be prime candidates for building tax-free income…

Read more »

Emma Raducanu for Vodafone billboard animation at Piccadilly Circus, London
Investing Articles

£10,000 invested in Vodafone shares 5 years ago is now worth…

Five years ago, Vodafone shares were sporting a dividend yield of 7% and investors were buying them in droves. Here’s…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 big reason to be bullish on UK shares

Stephen Wright thinks an emerging trend of UK companies buying back their own shares could be a positive force for…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

Here’s the average return from the FTSE 100 over the last 5 years

In the last five years, the FTSE 100 has generated better returns than investors might think. And that's not just…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

2 shares I’m looking to buy if the stock market crashes next month

With the stock market heading into what's often a seasonal down time, Stephen Wright's getting ready for potential opportunities to…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

Here’s the stock that Warren Buffett’s buying hand over fist in 2025!

Despite being an overall net seller of stocks in 2025, Warren Buffett has also been snapping up shares of this…

Read more »