I reckon investing in quality dividend stocks could be the gateway to unlocking a second income stream.
Let me explain how I’d approach this challenge if I were starting from scratch today.
What I’d do and crunching numbers
It’s often easier to save money in a low interest savings account. However, I reckon putting that money to work through a Stocks and Shares ISA could help me build wealth and an additional income.
The great thing about this type of ISA is a generous £20K allowance, and the fact that dividends aren’t taxable.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The next task to undertake is stock picking. Naturally, I want to maximise my pot of money, so I want to pick the best dividend-paying stocks. For me, this includes established blue-chip firms, with lots of information readily available, a track record of payouts, and exciting future prospects.
With an investment vehicle in place, and a stock-picking method decided, I need to put some money into my ISA, and start buying shares.
Let’s say I have £17K in savings I want to use as an initial investment. Next, I’d like to put £300 per month into my ISA too. I’m going to aim for an 8% rate of return, and follow this plan for 25 years.
After 25 years, I’d be left with £410,090. In order for me to enjoy this later in life, I’ll draw down 6% annually, which is £24,050. On a monthly basis, this equates to just over £2K.
I’ll admit that in theory this sounds great, but there are caveats. Firstly, dividends are never guaranteed. Next, all stocks come with individual risks that could hurt earnings and performance. Finally, I may not achieve that 8% yield, which could impact the final amount after 25 years, and my final additional income amount.
Stock picking
If I was following this plan, Assura (LSE: AGR) is a stock I’d love to buy to help me boost my ISA and final pot.
A big reason for this is due to Assura’s defensive traits, and investor returns policy. It makes money from renting out properties. As it’s set up as a real estate investment trust (REIT), this means the firm must return 90% of profits to shareholders.
The type of properties Assura specialises in is healthcare facilities for organisations such as the NHS, so premises such as GP surgeries. The draw here is that healthcare is an essential for all, no matter the economic outlook. As the population is growing and ageing, earnings growth and returns could be on the cards. Finally, renting to the NHS is a safe bet, in my eyes. This is because the government is essentially paying the rent, and there’s little to no chance of defaults.
On the other side of the coin, Assura is at the mercy of economic volatility. REITs use debt to fund growth. During periods of higher interest rates, like now, this debt can be costly to obtain and service. This threatens earnings and investor returns.
Speaking of returns, Assura shares offer an enticing dividend yield of just under 8% at present. This is in line with my target.
The post £17K in savings? I could turn that into a second income worth £2K a month! appeared first on The Motley Fool UK.
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Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
