How I’m investing in income stocks for £500 of passive income a month!

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As inflation hits levels not seen in decades, I’m increasingly looking at income stocks to help negate its impact on my portfolio. While we’re currently seeing some investors switching to value and dividends over growth, income stocks have long formed the core of my portfolio. For me, passive income from dividend stocks represents a secondary income source and this is something I want to build on.

Broker AJ Bell expects the average dividend yield from the FTSE 100 to be around 4.1% in 2022. Footsie companies are forecast to deliver £114bn in returns to shareholders during the year, making it the second-best year on record for returns.

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So with an average 4.1% dividend yield, I’d need just over £150,000 invested to receive £6,000 a year in dividends, or £500 a month. However, if I invested £100,000 in stocks averaging 6% dividend yields, I could also receive £500 a month. Here are some I’ve invested in, or have on my watchlist, to help me maximise passive income.

Super-high-income stocks

It’s worth highlighting that dividends are by no means guaranteed and super-high dividends are often unsustainable. Therefore, I’m normally cautious about these stocks and check metrics like their dividend coverage ratios.

Housebuilder Persimmon is the highest payer on the FTSE 100. Buying today, I can expect an impressive 11.3% dividend yield. While I think housebuilders are good long-term purchases, offering attractive dividends right now too, there might be some short-term pain. Interest rate rises and the cladding crisis have all weighed on their share prices.

Life insurance specialist Phoenix Group, which owns household names like Standard Life and ReAssure, is another strong passive income option. Buying today, I could expect a dividend yield of 8.3%. 

Another smaller option is Steppe Cement. I could expect a 10.7% dividend yield from this Kazakh cement manufacturer. That’s pretty good for a penny stock and is among the best returns on the LSE. It performed well last year on the back of a strong Kazakh property market. However, one issue is the spread between the buying and selling price.

High-income stocks

Housebuilder stocks are a good place to look for strong dividend yields and I think there are long-term growth prospects here too. Vistry Group is an attractive passive income opportunity. Buying at today’s price, I can expect an annual yield of 7.73%. Barratt Developments is offering a 6.3% dividend yield after a stellar year in which pre-tax profit rose to £812.2m from £491.8m in 2020.

Further down the list is Lloyds. The bank is offering a decent 4.6% dividend yield but I think there are also growth opportunities for the UK’s biggest mortgage lender. Long-term demand for homes looks strong as successive governments have failed to address the imbalance between supply and demand. Although there could be some short-term pain if demand for property falls this year.

Likewise, NatWest isn’t offering dividend yields as high as others on this list, but it’s got a healthy dividend coverage ratio and it could also benefit from increased interest rates, assuming it doesn’t hurt demand. If I bought today, I could expect a dividend yield of 5.1%.

With a diverse portfolio, featuring some of these stocks, I could hope to generate solid returns from my portfolio but I have to remember that all these stocks come with risks and no dividends are guaranteed.