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The stock market has been used for many decades to generate a passive income for investors. From using dividend shares through to growth stocks with potential share price appreciation, a FTSE 100 portfolio can be built for an effective end goal. If the goal was to reach a £3k monthly income, here’s how it could happen.
Figuring out the strategy
Let’s begin with the numbers. £3k a month equates to £36k a year. Realistically, even with a high yield, the investor would need to have a portfolio size worth hundreds of thousands of pounds. Very few of us have this kind of money sitting around. But that doesn’t mean we have to discount the idea altogether. Rather, investing regularly over a period of time in smaller increments can be more effective.
For example, each month an investor could put £250 in dividend shares and a further £250 in growth shares. This could provide an average yield of 9% a year in the long run. This would roughly be split with an 8% dividend yield from income shares, with an estimated 11% compounding share price appreciation from the growth stocks. Of course, these are just projections. Share price gains or future dividends aren’t guaranteed at all, so the actual portfolio yield could be higher but could also be a lot lower than my assumption.
If an investor kept up this strategy successfully, by year 22, the portfolio would pass the £400k mark. From here, it could generate £3k a month. Granted, this requires a long-term vision to be viable, along with the investor likely being younger than 50, to fully enjoy the income in retirement.
The numbers can be tweaked. If an investor can put £400 a month in both income and growth shares, this could shorten the time needed down to 18 years.
Targeting high-yielders
One example of a stock that could be considered for inclusion is Aberdeen (LSE:ABDN). The wealth and investments provider has a dividend yield of 7.94%. The share price is up 26% over the last year.
The business has pivoted back to more fundamental operations recently, rebranding from abrdn back to the more familiar Aberdeen. This is part of a broader strategic repositioning to focus on growth and clarity. This is already translating into better financial performance, with the H1 results showing £137m worth of cost savings. The investing platform Interactive Investor saw record net inflows of customer money, with a 25% increase in profit versus the same period last year.
This helps to give confidence in the dividends, which can be backed by improving cash flow. If we see further cost savings and growth in assets under management, it should support an increase in the dividend per share in the coming years.
The wealth management space is becoming a larger market, which brings opportunities but also risks. More high-street banks are turning their focus to this area, so competition will increase for Aberdeen. Yet even with this, I feel the existing client base puts it in a good position for retention.
