£5,000 in savings? I’d target dividends of £1,903 a year from income shares

A recent study revealed the biggest worry for UK savers with more than £5,000 to invest is ‘losing money’. For this reason, high-dividend-paying income shares might be an excellent lower-risk alternative.

Low-risk doesn’t mean low earnings. Even £5,000 in savings could one day lead to a £1,903 yearly passive income. But this would be driven by big dividends rather than speculative stock gains. 

The UK is arguably the best place in the world to look for quality income shares too. The FTSE 100 average yield is nearly three times the S&P 500 yield. 

Cash returns

Of the 100 stocks on the index, 24 offer a dividend yield of 5% or more. These dividend payments make up only part of my return too. I’d hope to see stock appreciation on top of that.

But because I’m building the portfolio around income shares, much or most of my income is delivered straight into my account. I don’t have to wait for the stock to go up in value to receive a cash return. 

Industries like banking and energy are well-suited to paying out. These are sectors where rapid growth isn’t on the table today. Instead, the profits are sent to shareholders by way of regular dividends sometimes one, two or four times each year. 

The UK is home to many of these types of stocks. 

Tax implications

While income shares can offer safety, they have drawbacks too. The focus on steady dividends rather than rapid growth means the best stock market returns rarely come from income shares. I might have to accept a smaller rate of return, especially during bull markets.

Dividends are heavily taxed in this country too. Higher-rate taxpayers might have to send 39% of any dividends they receive to the taxman. 

This is why it’s crucial to buy income shares through the tax shelter of a Stocks and Shares ISA. This really is an amazing account. 

The tax exemption is for life and the deposit limit of £20,000 ia year s very generous – higher than the £5,000 example I’m working with.

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.

How much

So how much could my £5,000 make me? With a conservative 7% return I might expect my savings to grow slowly at first, then really ramp up later on. I’d be looking at this for the long term, as anyone really should with this kind of investing. 

After 30 years, my £5,000 might have snowballed into £38,061. That’s a decent chunk of time, but that’s also a decent return. 

At that point, I could start collecting the cash rather than reinvesting it. Let’s say the dividend amount is 5%. Well, that means £1,903 would be entering my account each year. Sounds pretty good to me.

The post £5,000 in savings? I’d target dividends of £1,903 a year from income shares appeared first on The Motley Fool UK.

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John Fieldsend 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.