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For many investors, an extra £1k a month would be a significant help. The flexibility to use it for personal expenses or to reinvest in new stocks is a huge advantage of having such an income.
However, working backwards means that it begins with building a solid FTSE 100 portfolio to generate the necessary funds. Here’s how someone might approach it.
Two main routes
Let’s start with analysing where the income could come from. The most straightforward is from dividends. If a company pays out these to shareholders, it acts as a regular cash payout. Based on the dividend yield, this can provide an investor with a yield anywhere from 0% to above 10% annually. However, people need to remember that dividends aren’t guaranteed.
Another source comes from capital gains. This occurs when someone buys a stock and its value appreciates. Let’s say an investor bought 100 shares in a company for a total of £1,000. If the stock rallied to a value of £2,000, the person could sell 50 shares, bank £1,000, and still be left with the original investment value of £1,000, retaining the remaining 50 shares. The main risk here is that there’s no certainty that a stock pick will gain in value. In fact, it could fall!
Looking at the numbers
An investor could consider allocating half of the monthly investment amount to growth stocks and the other half to dividend shares. Over the long term, I believe the average yield on income stocks could be around 6%. For growth stocks, the capital gains could work out to be 10% a year. Therefore, the portfolio is expected to yield an overall return of 8%.
If an investor adds £300 a month to each bucket, this £600 total could grow over time. After 12 years, the total pot would be large enough to stop needing fresh capital. Into the following year, it would generate an average of £1k a month.
Of course, the exact timing depends on several factors. However, it provides a rough estimate to give everyone an idea.
Finding good picks
One example for consideration would be Weir Group (LSE:WEIR). Founded in 1871, the Scottish-based engineering company supplies equipment, services and technology to the global mining and minerals sector.
Over the past year, the share price is up 31%. If we increase this period to five years, it’s up 91%, showing it would meet the criteria for the growth stock category. In terms of reasons for the gains this year, it has been partly due to mining customers increasing capex after a long period of underinvestment. In fact, this was noted during the half-year report.
Looking ahead, I believe mining investments can accelerate significantly from here. This would be driven in part by the demand for metals for electrification and battery production. I’m also positive on the stock being held for the long run as it’s a business that has survived the test of time.
One risk is that as a global company, Weir’s exposed to “macro-economic and geopolitical uncertainty” it spoke of in the recent results. This can make it tricky to operate in and can cause unexpected supply chain issues.
Overall, I think it’s a good stock for investors to consider if they’re looking at this income strategy.
