In finance, there’s no such thing as a guaranteed outcome. I can’t say for certain if a stock I buy will go up in value, or if a dividend stock will continue to pay out passive income. Yet I can try and build a portfolio that’s as bulletproof as possible, so that I can have confidence that it can weather storms. Here’s how.
Filtering for the good stuff
In my eyes, one of the best filters I can apply is the track record. Just like I mentioned, I can’t say for certain if a dividend stock will keep on paying out income. But if the stock in particular has a proven history for over a decade or more of payments, it does make me feel confident. For example, if cash was paid out even during the pandemic, it stands to reason that the company can withstand problems.
Another way I’d invest is to filter for stocks with a decent dividend cover ratio. This measures how many times the dividend can be covered by the earnings. Ideally, this ratio should be well above 1. A ratio around 2 shows to me that the income is sustainable. If it’s below 1, then this shows that a dividend cut could be coming.
Finally, to bulletproof my income stream I’d make sure I had a portfolio of at least a dozen stocks. Sure, this can be built up over the course of several years. But the key factor is that the more companies I own, the less I’m going to be impacted if one has problems in the future.
One that I’d include
A good example that ticks the boxes is Rathbones Group (LSE:RAT). The UK wealth manager sits in the FTSE 250, with a current dividend yield of 5.45%.
It has a good track record, with 13 consecutive years of the dividend being either increased or held. As a mature company (founded in 1742), dividends are a key way that the business keeps shareholders happy.
I think the income will be sustainable going forward thanks to the solid business model it operates. The higher the funds under management and administration (FUMA), the higher the fees and commissions can be to generate revenue. The good news is that in the half-year report, FUMA had grown to £60.5bn from £58.9bn from 2022. If this keeps ticking higher, then revenue and profitability should be taken care of.
I do note the 24% fall in the share price over the past year. I think part of this is to do with the short-term pains associated with integrating Investec Wealth to Rathbones. Further, the Q4 update flagged up that “economic uncertainties are expected to persist in 2024”. This could provide volatile markets that could cause investors to pull out funds.
The dividend cover ratio for Rathbones is currently 2. This also gives me confidence that this stock is sturdy going forward. If I was starting from scratch to build an income portfolio, I’d consider buying it.
If I invested £500 a month in a dividend portfolio with an average yield of 5.45% for the next two decades, I could be set with a pot worth £218k. The following year, this could pay me out just under £1k on average each month.
The post How I’d invest to make £1k of monthly bulletproof passive income appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Rathbones Group Plc. 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.
