Using dividend stocks to generate passive income is an idea that dates back hundreds of years. However, today it is more critical than ever, with UK companies paying out enormous sums of dividends every month.

Are you curious what it could look like in practice? Let me explain.

Dividends: the basis of income

What are dividends? When a company generates free cash, it can decide what to do with it. This may mean saving it for a rainy day or investing it in business development.

Another option, however, is to pay out some or all of it to shareholders. This is what we call a dividend.

Dividends are never guaranteed. A company may discover that its operations generate less free cash than before, or it may simply change its priorities.

However, if it does generate money and pays it out as a dividend, this is a potentially lucrative opportunity for an investor.

To reduce the risk of a dividend being cut or canceled, a wise investor will spread his portfolio across a variety of stocks.

Aiming at the target

The amount earned depends on the average dividend yield of the portfolio. Though FTSE100 yield is currently just north of 3% (which equates to £3 in dividends per year per £100 invested), I think in today’s market a 6% yield is realistic while still sticking to high quality blue chip companies.

At this level I earn an average salary £150 a week in passive income would require a portfolio of 130,000. pounds.

It may be a lump sum amount. Or someone might assume Stocks and shares ISA then drip in the money, initially reinvesting the dividends, until the portfolio reaches the desired size. This approach is known as mixing and can be profitable.

With a contribution of £250 a week and a rate of 6% a year, it’s basic to go from an empty Stocks and Shares ISA to one worth over £130,000. pounds would take just eight years. That’s enough to earn £150 a week in passive income at a rate of return of 6%.

One dividend stock to consider

One stock that investors should consider for its passive income potential is FTSE100 financial services company Standard life (LSE: SDLF).

Standard Life’s business focuses on retirement-related savings and pensions. This is a massive deal – none of us are getting any younger!

Over the years, Standard Life has consolidated many businesses under its care. So around one in five British adults is now a customer.

This gives FTSE 100 listed companies economies of scale. Its enormous customer base is an advantage. I also like its brands, deep expertise and a business model that has been proven to generate cash.

One risk I see is the impact an unstable economy could have on parts of Standard Life’s portfolio. For example, he/she has a mortgage book and may need to write down some valuations if the property market goes down.

However, from a long-term perspective, I like the look of the company with a 7% dividend yield and a stated goal of maintaining a growing dividend per share year over year.

Is it worth investing £5,000 in Standard Life now?

If investing expert Mark Rogers and his team have stock advice, it can pay to listen. After all, Twelfth Magpie’s flagship Share Advisor newsletter, which it has run for almost a decade, provides thousands of paying members with the best share recommendations from across the UK and US markets.

Mark believes there are 6 standout stocks that investors should consider buying right now. Want to see if Standard Life is on the list?

Christopher Ruane has no position in any of the companies mentioned.