The concept of making passive income from the stock market is very appealing. Yet when I started to get involved in buying dividend stocks, I wish someone had told me about a little trick that could have made my future income stream considerably higher. So even with £99 a week, here’s how I could build up a generous future amount.
The sweet taste of compounding
I don’t think I was alone in thinking that when I got paid a dividend, I could spend it straight away. I’d made my passive income and was free to enjoy it. However, if I had taken the dividend and bought more shares in the same company, I would have benefitted from compounding.
This ‘secret sauce’ sometimes isn’t known to new investors. Or sometimes people do know about it but choose to ignore it as they want the money right now. Compounding refers to the process of money increasing at a faster pace over time.
For example, let’s say I bought £500 worth of a stock that paid me £50 in dividend income a year. Instead of spending it straight away, I could buy £50 worth of the same stock. Next year, with a holding of £550, I could earn £55. If I repeat this for several years, my income further down the line is much higher than just enjoying the same £50 each year.
A dividend stalwart
A stock that would have served this purpose well is the Murray Income Trust (LSE:MUT). It has a current dividend yield of 4.65%, with 24 years of consecutive dividend growth. That’s an incredible statistic to think about.
If I had bought it a couple of decades ago and reinvested the dividends, my investment pot would be looking very healthy. I don’t own it but am seriously thinking about it for future income.
The trust (run by abrdn), focuses on buying equities that have an above-average dividend yield but that also have the potential for capital appreciation. The latter part is evident, as the trust has risen by 8% over the past year.
Current holdings include popular names such as Anglo American and Coca-Cola HBC, but also some more unusual companies such as Air Liquide.
Given that I don’t see a stock market crash any time soon, I think the stocks owned by the trust should continue to grow in value (and income potential) looking forward. However, a risk is that over 80% of the trust is focused on UK shares. I’d prefer for this to be more diversified, such as with more US or Asia exposure.
Adding up the pennies
If I invested £99 a week (or bundled it into a monthly sum), my target dividend yield would be 5%. If I kept this up for a decade, my pot could be worth £62.1k. Of this, £14.2k would have come from dividends that would have compounded in value!
Of course, when forecasting that far in advance, I need to take my projections with a pinch of salt. But it does go to show how by being disciplined now can help me further down the line.
This post was originally published on Motley Fool
