There are plenty of ways to generate income from an investment portfolio, but dividend stocks are by far my favourite. By simply holding a position in a dividend-paying enterprise, money automatically starts pouring in without having to lift a finger.
Depending on how much initial capital an investor has, it can take some time for a dividend income stream to become significant. But even when starting from scratch, a small monthly contribution may be all that it takes, thanks to compounding returns.
With that in mind, let’s take a look at how to start earning an extra £100 a week.
Crunching the numbers
Right now, the FTSE 100 offers a respectable dividend yield of around 3.6%. That £100 a week translates to £5,200 a year. Therefore, at this yield, my portfolio would need to be worth just shy of £145,000 to hit this target.
That’s obviously not pocket change. However, the FTSE 100 also provides capital gains. And historically, that’s helped push the index’s average return to around 8%. So if I were to regularly invest a small sum each month, say £250, I could actually build a £145,000 portfolio in just under 20 years.
Frankly, it’s quite a long time to wait. The journey could be significantly accelerated by investing more capital each month. But since that’s not a luxury all investors have, there’s another solution – stock picking.
Right now, there are over 50 dividend stocks in the FTSE 350 offering a yield of at least 6%. While not all of these are going to be terrific investments, there should be enough options to build a quality, balanced income portfolio.
At this level of payout, my portfolio would only need to reach around £86,000 to generate £100 in weekly passive income. And if I assume it will also generate a similar 4% extra return from capital gains, I could hit this goal within less than 14 years – six years faster!
A 6% dividend stock to buy now?
Maintaining a 6% dividend yield over the next 14 years is far easier said than done. However, one firm that might have what it takes is TP ICAP (LSE:TCAP).
The company’s the world’s largest inter-dealer broker by revenue. In oversimplified terms, it powers the transactions between different financial institutions, making it a critical piece of modern-day financial infrastructure.
Since the group primarily earns revenue from transaction fees, the higher volumes triggered by market volatility have been a massive boon. So it’s no surprise that shares have surged more than 45% over the last 12 months. And even now, management still remains confident in the long run. At least, that’s what the recently launched £30m share buyback programme paired with reiterated dividends would suggest.
Of course, it’s by no means a risk-free investment. TP ICAP thrives off of high trading volumes. So when markets are calm, growth becomes far more challenging. The same is true for any other risk factors that adversely impact trading activity.
Nevertheless, volatility’s an unavoidable characteristic of financial markets. So while earnings may be lumpy, in the long run, they should continue to trend up as TP ICAP retains its dominant leadership position. That’s why, despite the risks, I’m considering adding this business to my income portfolio once I have more capital at hand.
This post was originally published on Motley Fool
