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Investing in dividend stocks through the right vehicle and by following some careful steps could help me unlock a second stream of income.
Let me explain how I would do it.
Steps I would follow
As my aim is to build wealth through dividends, a stocks and shares ISA is the most sensible option, due to the favourable tax implications. Plus, the £20,000 allowance is quite generous.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
Next, I need to pick the best stocks with the highest chance of profitability. I want to make sure that there are the best chances of making regular returns today, as well as getting paid in the future. One of the things I will look at is the company's balance sheet, as well as historical track record. However, I understand that past performance is no guarantee of future performance.
Finally, I would like to diversify my portfolio. I think about 10 stocks could help me achieve my goal.
Let's say I have £15,000 ready to invest and get started. If I then invest £250 a month for 25 years, aiming for an 8% return, I'd be left with £347,859. At that point, I'd be earning a 6% return per year, leaving me with just over £20,000 to spend on whatever I want.
It's worth remembering that dividends are never guaranteed. Also, I may not achieve the 8% yield I'm looking for. If this happens, I'd be left with less money to withdraw and spend as part of my additional income stream. Finally, all individual stocks carry risks that could hurt earnings and payouts.
Example of stock selection
If I were following this plan today, Land Title Group (LSE:LAND) is the kind of stock I think could help.
The company, often referred to as Landsec, is set up as a real estate investment trust (REIT). It invests in income-producing properties and makes money from them. Plus, REITs are required to return 90% of profits to shareholders, making them attractive dividend stocks for investors like me.
One of the things I like about Landsec is the diversity of its assets. Many REITs specialize in one type of property, but Landsec has a range that spans many sectors, including retail, office, leisure and more. Diversification is a great way to mitigate risk.
From a profitability perspective, a 6.6% dividend yield would go a long way toward helping me achieve my goal of earning additional income.
However, from a bearish perspective, I am aware of a couple of risks that could hurt the stock and returns. The debt on its balance sheet is something I will be monitoring closely. The other is the changing demand for commercial property. For example, demand for office space has fallen since the pandemic and work-from-home trends. Landsec will have to find a way to change course and adapt to this, or risk falling earnings.
Overall, as one of the UK's largest property companies, with a £12bn portfolio and an attractive level of returns, Landsec shares seem like a decent investment to me.
