Image source: Getty Images
In my opinion, investing in dividend stocks could be the gateway to unlocking a passive income stream.
This is how I would do it if I had to start from scratch today.
Step by step
Firstly, I would open a stocks and shares ISA as my investment vehicle of choice. For me, this is a no-brainer as I have to pay less tax on dividends received this way, plus an annual allowance of £20,000.
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.
The next step is to choose the best dividend stocks. Aspects I look at include industry position, performance and payment history, and balance sheet, which can tell me about a company's financial health as well as future prospects. Additionally, I would diversify my stock portfolio to help mitigate risk.
Risks that concern me
Dividends are never guaranteed, which is a concern. Plus, each individual stock you would buy carries its own risks that could affect performance and payouts.
Finally, I am considering a certain return level to target a specific pot to withdraw funds from. If I win less, I am left with less money to withdraw funds from and enjoy.
Doing numbers
Let's say I have £11,000 to start my trip. I would also use £200 a month from my salary to top up that sum.
My plan is to invest for 25 years and aim for a return of 8%. At the end, I would be left with £270,947. If I withdraw 6% per year and divide that figure into weekly instalments, I would be left with £312 per week.
A stock I would buy in this process
I would buy it quickly TP ICAP (LSE:TCAP) shares in an instant to help me achieve my goals.
The brokerage, data and analytics business has a broad reach across the globe, serving some of the world's largest industries including energy, financial services and commodities.
From a fundamental perspective, there are many positive aspects. A dividend yield above 6% is extremely attractive. In addition, the stock seems to me to have a good price-to-earnings ratio of around six.
As for recent results, a half-year report was published last month indicating that the group's revenues and EBITDA would increase compared to the same period last year. Furthermore, forecasts indicate that they could grow significantly in the coming years. However, I understand that forecasts do not always come true.
Looking ahead, TP ICAP’s data analytics division could hold the key to explosive growth in the future as well as sustained returns. With an existing market presence and potential artificial intelligence (ai) implications to power its products, I will be keeping a close eye on this sector.
However, from a bearish perspective, the firm's brokerage business could become obsolete fairly quickly. This is due to the natural change in technology and work practices. Executing trades over the phone is becoming a thing of the past. Earnings and returns could be affected in this regard.
Overall, TP ICAP seems like it could offer me good prospects for regular payments that would help me create an additional income.
