Home » Investing Articles » How to build a passive income with blue-chip dividend stocks
Here’s how you could develop a sustainable income through investing in large-cap dividend stocks.
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Peter Stephens
Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.
Latest posts by Peter Stephens (see all)
- Stock market rally: is the bubble set to burst? - 4 March, 2021
- How I’d aim to generate a growing passive income from dividend shares - 4 March, 2021
- I’d listen to Warren Buffett’s advice to buy undervalued shares today - 4 March, 2021
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Building a passive income from blue-chip dividend stocks is a realistic goal for many investors. Doing so could lead to a worthwhile second income, or increased financial freedom in older age.
Of course, there is a temptation to lock-in profits made from successful investments. Similarly, spending dividends received, rather than reinvesting them, may also seem like a good idea in the short run. However, sticking with stocks that are delivering high growth and rising dividends could be the best means of producing a sustainable income in the long run.
Reinvesting dividends
Although it can be tempting to spend dividends received each year in order to supplement a primary income, the impact of reinvesting them could be far more appealing in the long run. In fact, various studies have shown that it is the reinvestment of dividends which accounts for a large proportion of total returns over the long run.
Reinvesting dividends ensures that an investor is a continual net buyer of stocks. This means that they may be able to benefit from the cyclicality of the stock market, in terms of buying stocks when they are experiencing challenging economic conditions. Dividends provide the cash flow to do so, and their reinvestment at opportune moments in the investment cycle could lead to growth and income opportunities for the long run.
Similarly, reinvesting dividends is a good idea due to the impact of compounding. Receiving an income on capital that itself was previously paid out as a dividend can have a significant impact on a portfolio’s value in the long run.
Long-term focus
It may also be tempting to sell blue-chip stocks that have delivered a strong performance since being purchased. Should there be a significantly better investing opportunity available elsewhere, then this approach may be logical. However, in many cases a stock’s price has risen because its strategy is performing well, and it has the potential to deliver further growth.
Warren Buffett has always been willing to hold on to his top performers, with his favourite holding period apparently being forever. He has been a shareholder in a number of his major holdings for decades, with them having a distinct competitive advantage that has enabled them to deliver above-average growth over a sustained period. Even though in some cases their valuations have moved to relatively high levels, their ability to generate consistent profit and dividend growth means that they have been worth holding.
Today’s opportunity
While today may not seem to be a perfect opportunity to build a passive income due to the risks that blue-chip stocks face from a possible global trade war, there are a number of stocks that could offer wide margins of safety. As ever, there are risks facing the stock market. But with investors having priced them in across a number of industries, now could be the right time to start building a portfolio of large-cap dividend stocks.
With a focus on holding over the long term and reinvesting dividends, it may be easier than many investors realise to successfully build a sustainable passive income.
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.Tax treatment depends on your individual circ*mstances and may be subject to future change. 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.
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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.
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