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The average salary in London is £37,000. This equates to an after-tax amount of £2,377 per month. Assuming you earn this amount but want to try to generate passive income, a good option I would consider is investing in dividend stocks. Interestingly, by targeting specific stocks I can get a very respectable amount over time.
Finding the right performance
I'm going to assume that my monthly bills total £2,000, leaving me with £377 each month to invest in the market. I'm going to put this to work regularly. One of the benefits of this is that my money can accumulate faster this way, instead of waiting and investing once a year.
I'm going to try to pick dividend stocks that have an above average dividend yield. He FTSE 100 The average return is currently 3.64%, so this is my benchmark to beat.
I'm trying to get the most bang for my buck, without being stupid. For example, Vodafone It has a dividend yield of 10.9%, one of the highest in the index. However, this will fall soon as the next dividend will be cut. The yield is likely to fall to 5.45%.
In terms of a sweet spot where I think performance is sustainable, I aim for a range between 6% and 7%. This also gives me a much greater choice of companies. Of course, a strong track record of paying sustainable income doesn't guarantee you for the future. But it's certainly a good indication that future dividends could hold up.
Bet on more income
As an example of a stock that is in this sweet spot, I would consider buying shares in Invertec (LSE:INVP). He FTSE 250 The bank currently has a dividend yield of 6.32%. At the same time, the share price is up 19% over the past year.
The banking sector as a whole has benefited from rising interest rates in recent years. This has increased the net interest margin, the difference between the rate charged on loans and what is paid on deposits.
Investec also has a strong corporate division, which it noted has been very engaged and active, helping to drive fee-generating activity for the bank.
This has contributed to increasing both Investec's revenue and profits. The 2023 results showed the highest revenue figure in more than five years. Thanks to good profits, a final dividend of 19 cents per share was announced, meaning that the annual figure increased by 11.3% compared to the previous year.
I think the business has good momentum going forward. One risk is that interest rate cuts this year could hamper net interest margin. However, such cuts should help boost confidence, which could help the corporate division perform even better.
Putting it all together
If I build a portfolio that has an average return of 6.5% and invest £377 a month, my pot increases quickly. It is not guaranteed and you could lose money. But after a decade, my wallet could be worth £64.2k. Next year, you could earn £347 a month in dividend income alone.
