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One of the main reasons I buy FTSE shares is to create a second source of income through dividend stocks.
Let me explain a simple approach I would take if I could. Additionally, I will break down an action that could help me achieve my goals.
my method
Firstly, I would set aside £300 per month. Next, I must decide on an investment vehicle. You could go the route of individual stocks, but you'd be required to pay taxes on capital gains and dividends.
In my opinion, the best option is a stocks and Shares ISA. This is because I wouldn't have to hand over a cent of my investments to the taxman.
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.
Now that I have my money and my investment mode ready, I need to tackle the hardest part. Buying shares!
There are a few things I would look for in a dividend stock. I would like to make sure that the business offers some stability or security. This could come in the form of defensive traits. Next, I would like to make sure you are on good financial footing. I would also like to ensure that the business is future-proofed and not replaced by something else over time. Lastly, I would like to guarantee a decent rate of return for my investments.
Doing some quick math, investing £300 a month for 25 years, aiming for a 6% return, would leave me with £209,237.
In order to enjoy this, I will be withdrawing 6% per annum, which equates to £12,554. That's a monthly figure of £1,046.
It's worth mentioning that dividends are never guaranteed. They are paid at the discretion of the company. Additionally, I am aiming for a 6% return, but this may not materialize. On the contrary, I could end up with a higher rate that could boost my coffers.
Defensive value
tesco (LSE:TSCO) looks like the kind of stock that could help me achieve my goals. For me, the largest supermarket in the country ticks all the boxes in terms of what I'm looking for mentioned above.
From a security perspective, a defensive view of the business is ideal. Everyone needs to eat. I don't see this changing, unless the human race is invaded by Skynet and machines run on oil and technology, instead of potatoes and chocolate (like me).
The financial side of the business also looks strong, with an attractive balance sheet leading me to believe the dividend could be safe. Of course, this could change.
From a yield standpoint, the stock currently offers a dividend yield of 4.5%. This figure is expected to grow in line with the business, up to around 5%. However, I understand that predictions do not always come true.
Finally, the stock looks like good value to me with a P/E ratio of just 11.
Despite my bullish view, Tesco could remain under pressure from supermarket disruptors Aldi and Lidl. The new(ish) kids on the block have been eating into the market share of the old guys. A focus on value for money and alternatives to favorite brands appears to have captured the nation's stomachs and wallets since its foray into the UK market. If this continues, Tesco's performance and returns could suffer.
