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Dividend stocks are an excellent way for investors to generate a second income. Of course, companies don’t have to pay out dividends. But by picking stocks with a good track record and looking for dividend yields above the index average, I think it’s possible to achieve an income over time that equates to the average UK mortgage payment.
Making the numbers work
For reference, data shows the current average mortgage payment is £1,253. That provides a benchmark of the size of income that ideally needs to be generated. In order to work out the size of the portfolio, we can work backwards. Without taking on an excessive level of risk, I think an investor could build a pot with an average yield of 7%.
Therefore, the investment portfolio would need to be worth £214,800. Very few would have enough money in a lump sum to make this happen overnight. Yet this isn’t a bad thing. By investing regular smaller amounts over time, it can act to build a stronger and more diversified portfolio over the course of several years.
For example, let’s say £750 was put aside each month. After 14 years, the pot could be worth in excess of £215k. In the following year, even without additional funds, the income payments could equate to £1,253.
Finding stocks that fit the bill
In some respects, the maths is the easy part. After knowing how much is needed to build the income pot, the next stage is to find dividend shares that align with your goals. One option for investors to consider is Man Group (LSE:EMG), which has a current dividend yield of 6.91%.
The investment management firm reported record assets under management (AUM) of £143.19bn back in the summer. For H1, it delivered net inflows of £13bn. This is important as it makes money primarily from the fees and commissions charged on the assets being managed. So the higher the number, the more positive it bodes for future revenue.
The momentum in flows gives me an indication that sentiment regarding the investment manager is strong. I think this is partly due to it having a wide range of trading strategies. As it’s not reliant on just one asset class or style, the risk isn’t all in one bucket. Some strategies underperform, others do well. This helps smooth out swings.
Over the past year, the stock’s down 10%. One risk is that investors might move money out of the active strategies Man provides and into cheaper, passive alternatives. The share price has reacted negatively to this in the past when management reported it happening.
I think Man Group’s a stock for investors to consider who are trying to build up the passive income potential from their portfolio.
