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Putting money into the stock market to build passive income streams, thanks to dividends, is a common approach. Millions of people globally do it.
Here in the UK, FTSE 100 companies alone pay out well over £1bn a week on average in dividends.
Still, with recent days bringing dramatic price falls in some part of the US stock market, there is palpable nervousness among investors about what might happen next.
The thing is – and it may be a surprise – that rocky stock markets can actually be great news for passive income hunters. Here’s why.
Regular investment in dividend shares can be rewarding
Say someone puts £250 a month into a share-dealing account, Stocks and Shares ISA or trading app. If they compound that at 5% annually for a decade, their portfolio ought to be worth around £38,820.
At that size, a 5% dividend yield would equate to some £1,941 in passive income annually.
What about stock market turbulence?
Now, in that example I used 5% as the annual compound growth rate. That can come from dividends. It can also come from capital gains though, conversely, any capital losses eat into it.
But how realistic is the 5% example I used? Right now, the FTSE 100 index of leading British shares yields 3.1%. That is only an average though, as some of the shares in the index yield less and some more.
So I think a 5% goal is realistic while sticking to a diversified range of proven blue-chip companies. Not only that, but stock market turbulence can help an investor buy a share at a lower price than before, meaning thy earn a higher yield.
A 7%+ yield from a household name
As an example, consider one of the FTSE 100’s highest-yielding shares: Legal & General (LSE: LGEN). At the moment, it yields a juicy 7.2%. It also aims to grow its dividend per share annually.
Dividends are never guaranteed to last though – and Legal & General’s history is instructive in this regard. It held its payout flat one year during the pandemic. Prior to that, it had grown it annually since a cut during the 2008 financial crisis.
Crises are a risk to the financial services company, as policyholders pull out funds and declining asset values threaten to eat into profits. That remains true in the current market, I feel.
Using a rocky market to your advantage
But it also means that, when times were tough in market, Legal & General’s share price became what now looks like a bargain. It crashed 38% in the early months of 2020. Someone who bought then would now be earning a yield of close to 12%.
Since a March 2009 low, the share price has risen 883%. So someone who bought then and hung onto the share would now be yielding an incredible 70%!
With its strong brand, large customer base and cash generative business model, I see Legal & General as a share worth considering even today for its passive income prospects.
Meanwhile, if rocky markets push down the prices of quality shares, all sorts of juicy opportunities might come along!
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
