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Most people dream of having a passive income stream. The bad news is that it doesn't happen overnight. The good news is that by taking some careful steps and investing regularly, I believe it's entirely possible.
Let me explain what I would do to achieve my goals of earning an additional source of income.
My approach
Let's say I have £20,000 to invest today. The first thing I need to decide is what I'm going to do with it and what investment vehicle I'm going to use.
For me, a stocks and shares ISA is an obvious choice as the dividends will help to grow my pot of money in the future and there is no tax to pay on dividends when using this type of ISA.
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 buy a diverse set of stocks with the highest possible dividend yields. This is the hardest part, in my opinion. I need to make sure that the stocks I choose offer the best returns, but consistently and at the best rate to grow my capital. Diversification is important because it mitigates risk.
My initial £20,000, plus another £150 a month, invested for 25 years with the aim of earning a 7% rate of return, would leave me with £236,019. I would then withdraw 6%. If I break this down into a monthly figure, I would be left with £1,180 a month. I can use this for whatever I like when I am retired, when I have fewer expenses.
It's worth mentioning the potential risks and issues. First, dividends are never guaranteed. Second, all stocks carry individual risks that could hurt payouts. Finally, the rate of return I hope to achieve may not materialize. This could leave me with less money in my fund to withdraw and enjoy.
A choice I would buy
If I were executing this plan today, I would buy Coca-Cola HBC (LSE:CCH) shares. I believe they could help me achieve maximum returns as part of a diversified equity portfolio.
The company is a partner of the Coca Cola A company that needs no introduction. It bottles and distributes many of the global beverage firm's products in many regions.
Coca-Cola HBC has been a great dividend payer for many years. The stock currently offers a dividend yield of just over 3%. While not the highest, the consistency of the yields, as well as its past track record of growing dividends, are appealing. However, I understand that past performance is no guarantee of future performance.
Moreover, the stock appears to have a good price-to-earnings ratio at the moment, with a P/E ratio of just 15, lower than the core business's P/E ratio of 22.
Given Coca-Cola's extensive brand power, reach and popularity, the company's future prospects for generating generous returns seem strong to me.
However, from a bearish perspective, if taste were to change, this brand power and consistent level of returns could be threatened. A more realistic risk is that the current volatility will lead to cheaper alternatives being sought due to tighter budgets. Coca-Cola is priced at a premium. If this were to happen, earnings and returns could be affected.
