Here’s how to invest £5k in the stock market to try and make an 8% yield.
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The stock market offers people an opportunity to grow their pot of money by making smart investment choices. If managed carefully, with proper risk management and a sound strategy, it can be a great way to earn a decent yield over what could be achieved elsewhere, such as saving money.
If someone had £5k of excess cash, here’s how it would be handled.
Thinking carefully
The current base interest rate is 3.75%. Someone may aim to earn double this return. Let’s say the target is an 8% yield. One way to achieve this would be through a strategy based on the bank’s dividend payments. If a stock is worth £100 and pays a dividend of £10 each year, the dividend yield is 10%. At the same time, if the investor just owns this share, the annual yield of the portfolio is 10%.
Of course, I’m not saying just buy one dividend yielding 8% share and put the whole £5k into it. But when I look FTSE 100 again FTSE 250there are currently 16 companies with yields above 8%. So I think it is possible to build a diversified portfolio with this as a target yield. Even if one of the examples has a yield of 10%, which may be considered high risk, it can be reduced by a low-risk stock with a yield of 6%. Taken together, a similar yield of 8% can be obtained.
Granted, benefits are not guaranteed. So in the future, the 8% yield could be lower if some companies reduce payments. Part of this can be mitigated by having a wide selection of stocks. However, it is a risk, which must be there given the potential reward of a delicious harvest. If the investor’s risk tolerance is too high, it can be adjusted to target a lower overall return.
A good harvest is offered
Part of making the strategy successful is choosing the right stocks for income. One example to consider is this Sequoia Economic Infrastructure Revenue fund (LSE:SEQI). As the name suggests, it is a company that lends to infrastructure projects, making money from interest income on loans and bonds.
Last year, the share price of the last period and the annual yield of 8.72 %. The company is known for its high dividend yield, supported by high interest rates on its debt portfolio. Put another way, the amount of interest paid on most loans provided is higher than a regular bank loan, due to the nature of the projects.
However, at the same time, I would not say that they are at great risk, since the company usually has some security with the physical assets that are being built. So, it’s in the sweet spot of having predictable cash flow from interest, but at a higher rate than usual, which supports higher profits.
Looking ahead, I don’t see the situation changing. Earnings cover of 1.5, which means that current earnings per share easily cover dividend payments. However, in terms of risk, loan defaults are a concern. The top five projects make up 21.44% of the total portfolio, which is the highest.
Despite this, I still think it’s a good stock to consider buying in pursuit of above-average yield.
