Image source: Getty Images
The concept of investing in dividend stocks for income is a very old one.
The only reason it lasts so long is because it can work so well. Another flexibility: it can match the amount of money a person has to save.
Let me go over some basics, to show what that might look like for someone targeting £750 a month in income.
Understanding the role of dividend income
£750 a month equals £9k a year.
If someone wanted to earn that interest from a bank account, they looked at the interest rate to decide how much to invest.
The Bank of England’s current base rate is 3.75%. Now, deposit accounts may offer less, but using the basic rate for example, £9k is 3.75% of £240k. So, someone targeting £9k a year in interest at 3.75% would need to invest £240k.
In some ways, dividend yields work along similar lines – but with some important differences.
Current rating FTSE 100 the yield is 3%. But in today’s market, I think 6% is achievable while sticking to blue-chip businesses. At a 6% yield, £9k income would take an investment of £150k.
Assignments have never been confirmed, however. Come to that, interest rates can also go.
These days it’s less likely that money in a bank account will be wiped out due to bank insolvency (the first £120k is usually covered by the compensation scheme at any rate). But stock prices can go wild.
That could be bad for the portfolio balance, if prices fall. But it would also be good in my opinion as the prices would go up.
So, along with the income, a person who invests in the stock market can get a lot of profit.
Investment machinery in the stock market
Before investing in the stock market to try to generate income streams, an investor should learn about some important concepts involved. Those range from stock valuations to how fees and commissions can eat into financial returns.
Given the last point, it makes sense to choose carefully when choosing a trading account, a Stocks and Shares ISA, or a trading app.
One income share to consider
One dividend stock that I think should be considered is its income prospects FTSE 100 property manager IM&G (LSE: MNG).
The company aims to increase its dividend per share annually – and in this week’s annual results it has done just that.
The current yield of 6.8% is well above the target figure I mentioned above.
Dividend growth wasn’t the only good news in the results. Another risk I’ve had with M&G in recent years is that investors are taking more out of their funds than they’re putting in.
But the company reported inflows of around £7.8bn last year from its open business (‘open’ because some M&G funds are closed to new capital). That’s encouraging, although risk is still a concern for me, especially in volatile markets like the ones we’re seeing right now.
IM&G has a strong brand and a large client base, with £376bn of assets under management and administration. It generates a lot of cash, which can help support continued profit growth.
