There’s no time like the present. The case for putting off for tomorrow something that can be done today never usually works out well in the long run. The same can be said with regards to setting up a monthly second income stream. Especially when using dividend stocks for this, the early I can get going the better. Here’s how I’d go about it starting from scratch.
Things to start ticking off
The first step is seeing how much I can allocate to dividend shares right now. A lump sum of £1,000 or more would be great to kick off with. At the same time, I want to run my numbers and set a realistic figure of how much I can invest each month going forward. This will help me to build up my portfolio to a level where it generates income each month.
Once I’ve got my figures sorted, I need to decide where to actually invest the money. There are three main elements to this.
To begin with, I need to pick stocks that have an above-average dividend yield. Naturally, the higher the yield, the higher the risk associated with the dividend payments. So I have to pick a risk level that I’m happy with.
Another element is the fundamental business operations. Is the company growing? Does it operate in a sector that has a bright future?
Finally, I need to check the usual dividend schedule. If I want to get monthly income, I’ll have a preference for stocks that pay out quarterly amounts. That way, if I hold a dozen shares, I should reasonably expect a payment of some form each month.
From zero to hero
The theory is great, but let’s now put it into practice. Let’s say I have my £1,000 initial investment ready to go and have picked Glencore, Anglo American, BT Group and HSBC as four stocks that I like.
By putting £250 in each, I’ll have a blended average dividend yield of 5.95%. Next month, I’ll endeavour to invest an additional £100 in each stock (£400 total). After a few months, I can mix it up and include some different shares. Ideally, I’d like to get the portfolio to a dozen or more stocks.
From the beginning, I know that if I can keep my average yield at 5.95%, I need to get to a pot size of just under £202k. This will ensure £1,000 of monthly second income from that point onwards.
Using that calculation, it’ll take me 21 years to reach the target. This will change from person to person based on how much someone can invest and how high a yield that can be achieved. Yet from a standing start of zero, it’s an impressive feat.
This post was originally published on Motley Fool
