How investing £100 a week in falling stocks can get me big passive income

Image source: Getty Images

Just because the market is down, I don’t have to sit around until the next bull market comes around. Of course, it’s never nice to see stocks in the red in my portfolio. But as an income investor, I can actually take advantage of dips to get better dividend yields for long-term passive income. Here is my action plan.

Why a fall is not a bad thing

To understand why I want to invest £100 a week in stocks even when the market is down, I need to understand how dividend yield is calculated. It is made up of the dividend per share and the current share price. Usually, the dividend per share only changes a few times a year. But the share price changes every day!

So, if the stock price goes down but the dividend stays the same, the dividend yield goes up. At this point, I can buy the shares and benefit from this improvement in performance. I am always open to the risk that the dividend per share will change in the future. Yet this is both a risk and a potential reward. The dividend payment may increase, it will not always be reduced.

Over the next few years, taking advantage of a declining stock market by increasing my exposure to income stocks is a smart move. Not only am I able to generate income during tough times, but in the long run I should also expect the stock price to recover.

Use £100 a week to generate passive income

By my calculations I should be able to find £100 a week to invest. I’m going to have to cut some expenses, but at the end of the day, I don’t think that’s an unrealistic goal to aim for.

With the money, I will set a filter to help me find the right stocks to invest in. I filter out all stocks that have paid a dividend for at least the last three consecutive years. I will add a filter for all those stocks that have also fallen at least 10% in the last month. I have to consider longer-term movements in stock prices. But as part of this strategy, I want to quickly recover a falling stock.

If I reinvest all of my dividends, my total pot can grow to earn me some big passive income. If I manage to achieve an average return of 6% over the next 10 years, I will have an account value of just over £66,000. If I want, then I can enjoy an income of £3,960 a year in the future!

Obviously, I have to be aware that buying a falling stock is risky. It might keep falling after buying it. If I have to sell the stock in the near future for some particular reason, I might sell at a loss. But I try to reduce this risk by taking the long term. I also diversify the stocks in which I invest. In my opinion, this is a manageable risk considering the rewards.