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I am grateful to be able to earn a decent income. However, I am also looking to build wealth and a second income.
I think it is very possible to do this through dividend investing.
Let me walk you through the steps I would take today if I were starting over.
Key things I would do
First, it is important to have an investment vehicle that maximizes the additional income I am seeking.
I think a stocks and shares ISA is an obvious choice. One big reason for this is the fact that dividends received are not taxable. Ideally I would try to keep as much of my profits for myself as possible, without the taxman calling me.
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 make sure I choose the right stocks with the best prospects for regular returns. I worry that the stocks with the highest yields are not always the best ones to buy. In some cases, the highest yields look good, as I will show in the example selection below.
For me, dividend investing is about investing in stocks that will offer me regular returns now and in the future. So, is there any element of future-proofing for the company I am considering? Can it continue to generate profits and offer me returns as an investor? Also, what is the company’s track record in previous years? The process of selecting stocks involves a lot of research and due diligence.
Finally, it is worth noting that dividends are never guaranteed. They can be reduced or cancelled to conserve cash at any time.
9.8% Yield!
If I had some money to invest right now to help generate my additional income, Phoenix Group Shares (LSE:PHNX) looks like an excellent stock to buy for my portfolio.
He FTSE 100 Index The income and savings giant boasts a powerful 9.8% dividend yield! I know I said before not to be fooled by high yields, but not all of them are bad.
In theory, buying £10,000 worth of shares, yielding 9.8%, could generate £980 in dividends.
In the case of Phoenix, I think it ticks all the boxes for a good dividend stock. For starters, the company has a solid balance sheet, which provides a level of security when it comes to shareholder returns.
Secondly, the company has an excellent track record of performance as well as cash generation. The second aspect is key, as stocks that possess solid cash levels tend to be the best dividend payers, generally speaking. However, I understand that past performance is no guarantee of future performance.
Looking ahead, the outlook also looks bright. As the UK population ages and many begin to think about their finances in their golden years, Phoenix is well placed to capitalise.
Finally, the stock appears to be a good value with a price-to-earnings ratio of just nine.
From a bearish perspective, short-term issues such as economic volatility, which cause many to focus on higher, essential bills rather than long-term savings, could impact cash generation, earnings and returns. However, as I am a long-term investor, this is not a major concern for me at the moment.
