Coffee lovers look away now. I am sacrificing my daily latte and snack to fund a regular investment in a FTSE 100 dividend stock. My life hack could generate a second income.
Will it be worth the caffeine withdrawal to fund a promising return? I think so, and here’s why.
Invest in the investor
My plan is to build an investment war chest by shunning coffee shops and putting the funds into shares instead. It could generate £2,000 a year (I typically buy for two people). The savings pot will be going towards shares in Schroders (LSE: SDR).
By funding my first year in advance, I can invest in around 400 shares, based on the current price of around £4.80.
There are two reasons why I have picked Schroders. Firstly, there is potential for the share price to reach £6 (a 25% increase), as it has done three times since 2015. The share price is up 8% year to date.
Secondly, there is a strong dividend yield of more than 4%. This could generate increasingly valuable returns the longer I maintain my home brew commitment.
Schroders is a UK investment management company with more than £700bn of assets under management, and a history of outperforming market benchmarks. In 2021, it generated record pre-tax profits of £836m from revenue of nearly £3bn.
Investing for the future
In the company’s 2021 annual report, group chief executive Peter Harrison referred to a “virtuous circle of investing for growth”.
That includes a focus on sustainability. Schroders is a founding member of the Net Zero Asset Manager (NZAM) initiative. It supports a decades-long plan to prioritise green investments and help businesses on the path to net zero.
Harrison said: “We must do this for both our business and our investments. The next two decades will be crucial for climate change.
“The successes of today enable the investments required to create the capabilities for the long term. But those investments will also shape our future 20 years down the line.”
This long-term thinking gives me confidence in my plan to make Schroders a multi-year investment. This way, I can benefit from the compound growth delivered by reinvesting dividends.
A long-term commitment
If I maintain my ‘Costa-living’ commitment and shun Starbucks, then over five years I will have invested £10,000 in Schroders. Reinvesting dividends could return a further £1,300 if the dividend yield averages 4.5%, based on today’s share price.
If I extend the commitment to 10 years, my total investment would grow to more than £25,000, including nearly £6,000 of potential dividend returns.
Not bad for the price of a coffee.
| Year | Investment | Dividend (4.5%) | Total investments | Accrued dividends | Balance (consistent share price) |
| 1 | £2,000.00 | – | £2,000.00 | – | £2,000.00 |
| 2 | £2,000.00 | £183.76 | £4,000.00 | £183.76 | £4,183.76 |
| 3 | £2,000.00 | £284.08 | £6,000.00 | £467.84 | £6,467.84 |
| 4 | £2,000.00 | £389.01 | £8,000.00 | £856.85 | £8,856.85 |
| 5 | £2,000.00 | £498.76 | £10,000.00 | £1,355.61 | £11,355.61 |
| 6 | £2,000.00 | £613.55 | £12,000.00 | £1,969.17 | £13,969.17 |
| 7 | £2,000.00 | £733.62 | £14,000.00 | £2,702.79 | £16,702.79 |
| 8 | £2,000.00 | £859.20 | £16,000.00 | £3,561.99 | £19,561.99 |
| 9 | £2,000.00 | £990.55 | £18,000.00 | £4,552.55 | £22,552.55 |
| 10 | £2,000.00 | £1,127.94 | £20,000.00 | £5,680.48 | £25,680.48 |
There is risk involved, not least focusing so much on a single shareholding. However, this is just the part of my portfolio funded solely from a lifestyle change.
That means I have a wide range of other assets to cushion me from any financial blows. These include a falling share price (which has dropped as low as £3.78 over the past five years) and any reduction in dividend payments.
However, I believe there is growth potential ahead. As an investment strategy, I expect it to mocha good return.
