Yesterday, I was walking down the street when an incredibly beautiful Ferrari growled past. I wouldn’t say I’m a materialistic person, but I did stop and think how wonderful it would be to one day have that car myself. One way in my personal investing that I can try and make this a reality is by regularly investing in dividend stocks to compound my gains. Here’s what I mean.
Establishing some ground rules
I feel that allocating £350 a month is achievable to reach this goal. Living in central London, I’m pretty sure I’d be surprised how much I could cut back on expenses by not eating out as much, or actually walking to places.
Ideally, I want to put this £350 into my Stocks and Shares ISA on payday so I don’t have it lingering in my main account, giving me an inflated view of how much money I have to spend!
Within my ISA, I can receive my dividend income without paying any related tax. This is an added bonus and can make a large difference when it comes to my profits in years to come.
Finally, it’s no use simply having an aim of getting rich or buying an enviable car without quantifying what this looks like. For me, I want to try and have a pot worth £100,000.
How I’m executing my plan
The FTSE 100 average dividend yield is 3.84%. For the FTSE 250, it’s 3.28%. This gives me a useful benchmark to use when trying to think about a realistic return.
However, there are stocks yielding above 10%. Even though I feel trying to target this yield is too risky, I believe I can sustainably make a return greater than the average.
From my calculations, I’m aiming for a 6% dividend yield from a collection of six to 10 stocks. But surely £350 split between this amount stocks isn’t enough money? For one month, yes. However, I’m investing every month. Over time, I’ll have a sizeable amount in each company, as well as diversifying my overall risk.
When I talk about risk, I’m mainly referring to the potential that one stock I own cuts the dividend, or falls on hard times. If this is the case, I’ll stop new investments to that particular share and select a new one instead.
The numbers actually work
If I stick to my plan, after 15 years I’ll have a pot above £100,000. Obviously, at this point, I could simply sell all my stocks and buy the car. Yet I might also be surprised to find that, in the following year, the dividend payments alone would total over £6,100.
Therefore, I could use this money to to lease a different car, and not sell a penny of my investment pot in my ISA.
Ultimately, I give myself the ability and freedom to make that choice through my long-term approach chosen today.
