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Investing in dividend stocks could be the gateway to unlocking a passive income stream, in my view.
Here’s how I’d go about it if I was starting from scratch today.
Step by step
Firstly, I’d open a Stocks and Shares ISA as my investment vehicle of choice. This is a no-brainer for me due to less tax to pay on dividends received in this mode, as well as a £20k yearly allowance.
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The next step is to pick the best dividend stocks. Aspects I look at include industry position, performance and payout track record, and balance sheet, which can tell me the financial health of a business, as well as future prospects. Furthermore, I’d diversify my pot of stocks to help mitigate risk.
Risks I’m wary of
Dividends are never guaranteed, which is a concern. Plus, each individual stock I’d buy comes with its own risks that could hurt performance and payouts.
Finally, I’m eyeing up a certain level of return to target a specific pot to draw down from. If I earn less, I’m left with less money to draw down from and enjoy.
Crunching numbers
Let’s say I had £11k to start my journey. I’d also use £200 per month from my wages to top this up.
My plan is to invest for 25 years, and aim for an 8% level of return. In the end I’d be left with £270,947. If I draw down 6% annually, and split that figure into weekly chunks, I’d be left with £312 per week.
One stock I’d buy in this process
I’d snap up TP ICAP (LSE: TCAP) shares in a heartbeat to help me achieve my goals.
The broking, data, and analytics business possesses wide reach across the planet. Plus it serves some of the biggest sectors in the world, including energy, financial services, and commodities.
From a fundamental view, there’s lots to like. A dividend yield of over 6% is hugely attractive. Plus, the shares look good value for money to me on a price-to-earnings ratio of close to six.
Moving on, recent performance has been positive, in the shape of a half-year report released last month. The update pointed towards group revenue and EBITDA increasing compared to the same period last year. Plus, forecasts indicate this could grow significantly in the coming years. However, I do understand that forecasts don’t always come to fruition.
With one eye on the future, TP ICAP’s data analytics arm could be the key to explosive future growth, as well as sustained returns. With an existing market presence, and potential artificial intelligence (AI) implications to boost its products, I’ll be watching this space closely.
However, from a bearish view, the firm’s broking business could become obsolete pretty quickly. This is due to the natural change in technology and working practices. Executing trades over the phone is becoming a thing of the past. Earnings and returns could be impacted here.
Overall TP ICAP looks like it could offer me good prospects of regular payouts to help me create an additional income.
