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Shares in companies that pay dividends to investors can be a good source of income. But they are not all the same and there are several different methods available.
Investors aiming for a specific goal – for example, £1,000 a month – can choose between several different strategies. And they all have different strengths and weaknesses.
High yield
Another approach involves focusing on companies with high dividend yields. In some cases – Legal & General to be a good example – this can be as high as 8%.
The basic strategy is to start with an initial investment and reinvest the returns for growth. By using dividends to buy more shares, an investor can earn more income over time.
Investors who take this route must be aware of the tax. With UK shares, there is stamp duty to be aware of and distributions from US companies are subject to withholding tax.
However, this can be a decent way for investors. And someone who invests £20,000 and reinvests dividends at 8% a year could be earning £1,000 a month over 25 years.
Share growth
Another way is to focus on stocks in companies that can grow and increase their profits on their own. Rightmove is a good example of this type of stock.
The dividend yield is currently 2%, but the company has doubled its dividend over the past 10 years. So investors get more money without having to reinvest their returns.
Of course, there is no rule that says anyone cannot reinvest their earnings to compound their returns at a higher rate. And in Rightmove’s case, that would lead to annual growth of 11%.
Over time, this can be a great strength. So investors looking for income should not just write down the stock because it has a low dividend yield.
A stock to consider
In general, investors must make a choice between cash today and prospects for future growth. But Games Workshop (LSE:GAW) is a stock that I think can offer investors both benefits.
paid a dividend of 2.29% compared to the previous trading day FTSE 100 average. But its growth in the last 10 years has been amazing and I think it’s still coming.
For the company Warhammer The franchise has been so successful that it has grown its dividends at an average of 30% per year for the past decade. That is an extremely impressive rate.
If this continues, an investment of £20,000 today will return £1,000 a month in dividends within 15 years. So I think it’s worth looking at even a low initial yield.
Investment of dividend
Investors must remember that dividends are never guaranteed. Games Workshop’s ability to continue to grow its profits depends on it continuing to grow its sales and profits.
A recession is always a threat to a company that makes products that people want rather than need. And unemployment in the UK has been rising recently.
The company’s strong intellectual property, however, allows it to return cash to shareholders without compromising its core assets. That’s why I think it’s for investors to look at.
