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One of my main reasons for investing in UK shares is to create a passive income stream that I can enjoy when I retire.
Let me share with you how I would try to do this, as well as an example of a dividend stock I would buy to help me achieve my goal.
The method and mathematics.
First things first, let's say I have £5,000 saved at the moment. On top of that, I would like to add £200 per month to my salary to top up my fund.
I need to make sure my money works hard and pays as little tax as possible so I can enjoy my profits. For me, a stocks and Shares ISA is perfect as I don't need to pay any tax on dividends.
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, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Next, I should try to find 5-10 quality stocks with good fundamentals, future prospects, and a decent rate of return.
Running some numbers, starting with around £5,000 and adding £200 per month, I'm going to invest for 25 years and aim for a 7% rate of return.
After this period of time, I would have £190,641 left. In order to enjoy this, I'm withdrawing 6% per annum, which equates to £11,438.
At this stage in my life, I will have paid off my mortgage and my children will no longer be reliant on “mom's bank”, so this is a good fund to use for whatever I want.
Of course, this plan has a couple of risks. The biggest problem is that dividends are never guaranteed. Also, although my goal would be 7%, the final payout could be lower, since stocks carry risks that could hurt returns. Alternatively, it could be more, leaving me with more money.
Asset Manager
FTSE 100 wealth manager Schroders (LSE:SDR) is a stock I like for a few key reasons.
Firstly, it's worth mentioning that Schroders' share price has been the victim of economic pressures lately. The shares are down 14% in a 12-month period from 458p this time last year to current levels of 390p.
This price drop does not worry me. In fact, it makes the stock look even more attractive with a forward P/E ratio of 12.
Next, a dividend yield of 5.4% is attractive. That's much higher than the FTSE 100 average of just under 4%.
Furthermore, Schroders is an established company. With more than £750bn in assets under management, according to the most recent figures, the business is huge. In addition to this, the company has been around for over 200 years. It's fair to say it knows a thing or two about dealing with difficult economic conditions, making money and rewarding investors.
Despite the bullish traits that appeal to me, I am concerned about inconsistent inflows in recent years, linked to lower investor confidence. This is mainly related to the economic turbulence of recent times. With fewer assets to manage, making money and rewarding investors can be more difficult. This is something I would keep a close eye on.
