Image source: Getty Images
I am looking to create a second income by investing in FTSE shares.
Let me explain how I believe this is possible through dividend investing.
My approach
A crucial aspect of my plan is to use the best possible investment vehicle. As my focus is on dividends, a stocks and shares ISA is, in my view, the most effective option. This is due to the favourable tax implications on dividends received, as well as a £20,000 per year allowance.
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 that I buy the best dividend stocks to accumulate money. I will do thorough research before buying stocks. I will look at aspects such as financial health, profitability history, future prospects, performance history, and industry position.
Considering the risks, first, dividends are never guaranteed. Also, each individual stock carries its own risks that could affect the payouts. Finally, I will try to achieve a certain level of return to maximize my money. However, I might earn less, which could reduce the money I would eventually withdraw.
Mathematics
If I do the math, I think it's essential that my plan has some structure. If I were to do this today, I'd start with £10,000, if I had any to spare. Plus, I'd add £300 a month to my salary.
If I followed my plan for 25 years and targeted an 8% rate of return, I would be left with £358,709. I would then withdraw 6% per year, which equates to £21,522 per year to spend on whatever I want.
Stock selection
A stock I already own that I think could help me achieve this plan is Primary health properties (LSE: PHP).
I like Primary's yield stock for several key reasons. First, it's set up as a real estate investment trust (REIT), which means it must return 90% of profits to shareholders.
Next, you look at defensive properties, such as doctors' offices and other healthcare services. These have defensive aspects, as healthcare is essential no matter the economic outlook.
Thirdly, it currently has a fantastic rate of return, a dividend yield of 7%. It has also been paying dividends since 2000. However, I understand that past performance is no guarantee of future performance.
Finally, the company's presence, earnings and returns could grow as demand for healthcare is only increasing due to the growing and ageing population in the UK.
As I said before, all stocks carry risks, and Primary is no exception. One of these is the recent staffing problems in the healthcare sector, related to disputes over pay and working conditions which have led to an exodus of professionals out of the sector or to other countries. Primary might have the assets to grow, but organisations such as the NHS that do not have adequate skilled staff to staff the facilities could harm Primary's growth and profits.
Another problem is economic volatility. REITs use debt to finance growth and buy new assets. Debt is more expensive when interest rates are high, a bit like now.
Despite the challenges, Primary appears to be an excellent stock to buy for its profitability and growth.
